What Is a Money Market Account?

A money market account is a low-risk saving option that provides more flexibility than a CD.

Savings
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A money market account combines the features and benefits of a savings and checking account, allowing convenient access to your deposits while earning more interest than a traditional checking account. While the average interest rate, according to CNET's sister site Bankrate, is 0.13% for an MMA, it's possible to find rates 15 times higher at some banks or credit unions. 

Unlike savings accounts, an MMA limits the number of withdrawals per month -- traditionally capped at six -- and may pay a tiered rate based on the account balance. The higher the balance, the more interest your account will earn. These accounts are considered safe investments as they are insured by the Federal Deposit Insurance Corporation if offered by a bank, or the National Credit Union Administration for credit unions, for amounts up to $250,000.

How a money market account works

A money market account is a type of savings account that offers features commonly associated with a checking account. Many MMAs have a higher minimum deposit requirement to open than a savings account and limit the number of withdrawals allowed per month. Like a checking account, a money market account provides owners the ability to access funds through debit cards or checks.

The interest earned on an MMA is variable -- that means it fluctuates in reaction to market conditions. As the Federal Reserve modifies the benchmark federal funds rate, banks raise or lower interest offered on deposit products. Additionally, a money market account can also offer a tiered rate, meaning that the higher the account balance, the higher the interest rate that's applied to balance. 

In exchange for the higher interest rate, a money market account limits access to available funds. Prior to 2020, the Federal Reserve limited the number of transactions on MMA to a total of six transactions per month. While the regulations have been amended to remove that limitation, many banks still impose the restrictions. 

How to open a money market account

Opening a money market account is a straightforward process. 

  1. Compare money market account features to make sure you're selecting the account with the most favorable benefits. Features, benefits and restrictions vary across the industry. You'll want to take note of:
  • Interest rates offered
  • Minimum deposit required
  • Minimum monthly balance required to avoid service fees
  • Limitations on access to funds

2. Once you've selected a bank or credit union, complete an application. 

3. Verify your identity.

4. Fund the account with at least the minimum initial deposit required.

How does a money market account differ from a savings account or a certificate of deposit?

A money market account differs from a traditional savings account in two key ways:

  1. A money market account offers debit card access and check-writing privileges as a method of accessing the deposited funds. Savings accounts generally provide electronic transfer access or an ATM card. Debit cards differ from ATM cards in that they can be used at payment terminals.
  2. A money market account also generally limits the number of times money can be transferred or withdrawn per month and require a minimum balance to avoid monthly service fees. 

There are also several differences between a money market account and a certificate of deposit, or CD.

  1. A CD is purchased with term lengths typically from three months to five years. However, some banks do offer shorter or longer terms.
  2. A CD is designed to encourage medium- to long-term savings. A CD restricts access to deposited funds by imposing an early withdrawal penalty if money is retrieved before the maturity date expires. 
  3. A traditional CD doesn't allow additional funds to be deposited into the account once it's established. A money market account doesn't restrict additional deposits after the account has been opened.

What's the difference between a money market account and a money market fund?

A money market fund is a type of mutual fund that invests in short-term debt like government bonds, cash and cash equivalents. Investors purchase shares and earn returns in the form of capital gains. Money market funds are considered low-risk investments but they are not insured by the FDIC.

Are money market accounts safe?

A money market account is considered to be a safe, low-risk investment provided it's issued by a bank or credit union that is insured by either the FDIC or NCUA, respectively, for up to $250,000.

How to choose the best money market account

When opening an MMA, there are several features to compare before deciding which is best.

  • What are the minimum deposit requirements? This will help you decide if an account will work with your savings budget. Also note any minimum balances required to avoid service fees. Such service fees will cut into earnings growth and should be avoided when possible.
  • What interest rate does the account earn? It's important to research accounts nationwide to find the best rates available. With the prevalence of online banking options, geographic limitations aren't necessarily an impediment to finding the highest interest rates.
  • Make note of all fees associated with the account. It's important to understand all fees and any restrictions that can result in penalties to ensure that your account growth is not compromised.

Pros and cons of a money market account

Pros

  • A money market account is considered a low-risk investment because it is insured for up to $250,000 by either the FDIC or NCUA that can pay a higher interest rate than traditional savings accounts.
  • It provides debit card and check-writing access to deposited funds.
  • Additional money can be deposited at any time. 
  • Higher balances earn higher interest rates for accounts that operate on a tiered model.
  • Most banks and credit unions offer MMAs through digital banking services so accounts and benefits can be compared nationwide to locate the best deals.

Cons

  • Transactions are typically limited to six per month. Under the excessive transaction rule known as Regulation D, most MMAs are restricted to six withdrawals per month (which extends to overdraft protection transactions, payments to third parties, electronic and telephone transfers and ACH withdrawals). Regulation D was suspended in 2020 and some banks have eliminated these limits on withdrawals; there are banks that continue to charge fees for exceeding withdrawal limits, however.
  • A money market account has higher initial deposit requirements than savings accounts.
  • There may be service fees imposed if balances fall below a target level.

A brief background on money market accounts

Money market accounts were created in the 1970s by Henry B.R. Brown, an engineer-turned-money manager, and his assistant, Bruce Brent. They developed the MMA concept as a way to attract smaller investors and circumvent large investment requirements to access higher rates available for Treasury bills. In those days, the minimum investment requirement started at $100,000 -- leaving most small investors on the sidelines. He pooled smaller accounts from multiple investors to meet higher investment minimums, creating the Reserve Fund.

Fast-forward 50 years to today to see that MMAs are well-known financial products offered by most banks and credit unions. They earn variable interest, the market rate -- hence the name "money market." 

The bottom line

Money market accounts share features common to both savings and checking accounts. They typically offer higher interest rates than checking accounts, but offer debit card and check-writing access to deposited funds. Money market accounts are best for savers looking for safe, low-risk savings options and have enough money to satisfy the higher initial deposit requirement. These accounts are best for short-term savings for those who don't need to make numerous monthly withdrawals.