What is a Money Market Account?
A money market account is an interest-bearing account at a bank or credit union—not to be confused with a money market mutual fund. Sometimes referred to as money market deposit accounts (MMDA), money market accounts (MMA) have some features not found in other types of accounts. Most money market accounts pay a higher interest rate than regular passbook savings accounts and often include checkwriting and debit card privileges. They also come with restrictions that make them less flexible than a regular checking account. They are important for calculating tangible net worth.
Money Market Accounts vs. Savings Accounts
How Money Market Accounts Work
Money market accounts are offered at traditional and online banks and at credit unions. They have both advantages and disadvantages compared with other types of accounts. Their advantages include higher interest rates, insurance protection, and checkwriting and debit card privileges. Banks and credit unions generally require customers to deposit a certain amount of money to open an account and to keep their account balance above a certain level. Many will impose monthly fees if the balance falls below the minimum.
Money market deposit accounts also provide federal insurance protection. Money market mutual funds generally do not. Money market accounts at a bank are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government. The FDIC covers certain types of accounts, including MMAs, up to $250,000 per depositor per bank. If the depositor has other insurable accounts at the same bank (checking, savings, certificate of deposit), they all count toward the $250,000 insurance limit.
Joint accounts are insured for $500,000. For credit union accounts, the National Credit Union Administration (NCUA) provides similar insurance coverage ($250,000 per member per credit union, and $500,000 for joint accounts). For depositors who want to insure more than $250,000, the easiest way to accomplish that is to open accounts at more than one bank or credit union.
Potential disadvantages include limited transactions, fees, and minimum balance requirements. Here is an overview:
Higher interest rates
Minimum balance requirement
Money Market Accounts vs. Savings Accounts
One of the attractions of money market accounts is that they offer higher interest rates than savings accounts. For example, in early 2019, their average interest rate was 0.15%, while the average savings account paid 0.09%, according to Bankrate. The highest money market account rate was 2.01%, while the highest savings account rate was 1.90%.
When overall interest rates are higher, as they were during the 1980s, 1990s, and much of the 2000s, the gap between the two types of accounts will be wider. Money market accounts are able to offer higher interest rates because they're permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, which savings accounts cannot do.
The interest rates on money market accounts are variable, so they rise or fall with inflation. How that interest is compounded—yearly, monthly or daily, for example—can have a substantial impact on the depositor's return, especially if they maintain a high balance in their account.
Unlike savings accounts, many money market accounts offer some checkwriting privileges and also provide a debit card with the account, much like a regular checking account.
Money Market vs. Checking Accounts
One potential downside of money market accounts, compared with checking accounts, is that Federal Reserve Regulation D limits depositors to a total of six transfers and electronic payments per month. The types of transfers affected are: pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers. Depositors who exceed the limits may be assessed a fine. If they continue, the bank is required to revoke their transfer privileges, move them into regular checking or close the account
However, depositors can make an unlimited number of transfers in person (at the bank), by mail, by messenger, or at an ATM. They can also make as many deposits as they wish.
- Money market accounts are offered by banks and credit unions.
- They generally pay higher interest rates than regular savings accounts and often come with debit cards and limited checkwriting privileges.
- Many banks also offer high-yield or high-interest checking accounts, which may pay better rates than money market accounts but impose more restrictions.
Money Market Accounts vs. Mutual Funds
Unlike the various bank and credit union accounts described above, money market mutual funds, offered by brokerage firms and mutual fund companies, are not FDIC- or NCUA-insured. (Banks may also offer mutual funds, but they aren't insured, either.) However, because they invest in safe short-term vehicles such as CDs, government securities, and commercial paper, they are considered to be very low risk.
Both money market accounts and money market mutual funds offer quick access to the depositor's cash. Money market accounts have the government-mandated six-transactions-per-month limitation mentioned earlier, which money market mutual funds do not. The companies that offer them, however, can place limits on how often depositors can redeem shares or require that any checks they write be for over a certain amount. The returns on money market mutual funds tend to be higher than those on money market accounts.
The table below compares some of the common features found in money market accounts and other types of deposit accounts. Because interest rates and other provisions can vary from one financial institution to another, it's worth shopping around.
|Money Market Accounts vs. Four Alternatives|
|Money Market Account||Savings||Checking||CD||Money Market Mutual Fund|
|Interest type||Variable||Variable||Variable (or none)||Fixed||Variable|
|Transactions per month||Six||Six||Unlimited||Zero||Unlimited|
A Brief History of Money Market Accounts
Until the early 1980s the federal government placed a cap or limit on the amount of interest that banks and credit unions could offer customers on their savings accounts. Many institutions gave out small appliances (such as toasters and waffle irons), along with other incentives, to attract deposits, because they couldn’t compete with money market mutual funds when it came to interest rates.
Introduced in the 1970s, money market mutual funds are sold by brokerages and mutual fund companies. Under pressure from the banking industry, Congress passed the Garn-St. Germain Depository Institutions Act in 1982, which allowed banks and credit unions to offer money market accounts that paid a “money market” rate, which was higher than the previous capped rate.
Alternatives to Money Market Accounts
Banks and credit unions offer many types of accounts, some with features that can make them competitive with—or superior to—money market accounts.
Passbook Savings Accounts
Unlike money market accounts, regular savings accounts typically have no initial deposit or minimum balance requirements. They also pay interest, although usually not as much as a money market account. Like money market accounts, passbook savings accounts are FDIC- or NCUA-insured. Both also restrict depositors to six transfers per month, with certain exceptions.
High-Yield Savings Accounts
Many banks and credit unions also offer high-yield savings accounts and, depending on the institution, the interest rate may be better than on their money market accounts. High-yield savings accounts are also FDIC- or NCUA-insured. A potential downside compared with money market accounts is that they may have more rules, such as requiring direct deposits or at least a certain number of transactions per month to avoid penalties.
Regular Checking Accounts
Checking accounts have one big advantage over their money market cousins—unlimited transactions, including checks, ATM withdrawals, wire transfers, and so forth. They are also FDIC- or NCUA-insured. Their main disadvantage is that they pay a very low (often zero) interest rate.
High-Yield/High-Interest Checking Accounts
Like high-yield savings accounts, these accounts offer interest rates that rival and sometimes exceed those of money market accounts. They also share the high-yield savings accounts' principal weakness, which is that they may have more complicated requirements, such as a minimum number of debit transactions each month. Frequently they also impose a cap—for example, $5,000—above which the high interest rate does not apply. In other respects high-yield checking is like regular checking, with unlimited checks, a debit card, ATM access, and FDIC or NCUA insurance.
Rewards Checking Account
This type of checking account may offer a sign-up bonus and other rewards, such as high yields, ATM fee reimbursements, airline miles, or cash back. The main downside is similar to high-yield checking: high fees unless the depositor satisfies all the rules, which vary by the institution. Otherwise, rewards checking functions like a regular checking account, including FDIC or NCUA insurance.
Certificates of Deposit
A certificate of deposit (CD) is like a savings account with a fixed duration, such as three, six, nine or 12 months, or multiple years up to 10. In exchange for locking in their money for that period of time, depositors generally get a higher rate of interest than they would with a regular savings account. However if they withdraw their money (or part of it) early, they'll pay a penalty, usually in the form of lost interest. Some CDs (known as liquid CDs) don’t penalize depositors for early withdrawals but pay a lower rate of interest. CDs are FDIC- or NCUA-insured but typically offer no provision to write checks, withdraw funds with a debit card, or add to the balance after the initial purchase.