Key takeaways
- Money market accounts are a type of deposit account that earns interest. Rates are often higher than traditional savings accounts.
- Money market accounts typically limit your withdrawals per month and have a higher minimum balance requirement than traditional savings accounts.
- Money market funds are different from money market accounts. Money market funds are investments in short-term debt securities.
When you think about where to keep your hard-earned cash, checking and savings accounts may come to mind first. These are solid options, but money market accounts may be worth considering. They can provide a mix of safety, growth and liquidity for your savings as you plan out your financial goals. This primer can help you decide if a money market account is right for you.
We'll cover these topics:
- What is a money market account?
- How does a money market account work?
- What are the benefits of a money market account?
- What's the best way to use a money market account?
- Money market accounts vs. savings vs. CDs: Which one do you choose?
- Money market account FAQs
What is a money market account?
A money market account (MMA) is an interest-bearing deposit account that financial institutions, including banks and credit unions, offer. These accounts typically combine features of savings accounts and checking accounts. If you're saving for a future goal but also want convenience and flexibility with your money, a money market account may be right for you.
How does a money market account work?
While a money market account is like a mixture of a checking and savings account, it has some key differences and features:
- A money market account typically has a higher opening and minimum balance requirement than traditional savings accounts, often around $2,500.
- Money market accounts can include checks and debit cards with ATM access. However, these accounts may limit certain monthly transactions, like online transfers and outgoing checks.
- In exchange, financial institutions often offer a higher interest rate on money market accounts than checking and savings accounts.
What are the benefits of a money market account?
You might consider saving with a money market account for several reasons. Benefits of this account can include:
- Interest: Money market accounts may provide a higher interest rate than a traditional savings account. The interest rate is typically variable, meaning it can change over time.
- Convenience: Unlike certificates of deposit (CDs), which hold your money for a set term, money market accounts often provide more flexibility when accessing your money. You may have a debit card and access to ATMs so you can make deposits and withdrawals.
- Check-writing privileges: You may be able to write a limited number of checks from your money market account, eliminating the need to transfer funds from savings to checking.
- FDIC insurance: The Federal Deposit Insurance Corporation (FDIC) insures money market accounts held at FDIC-insured banks. Deposits are insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
What is the best way to use a money market account?
You may already be contributing to a traditional savings account on a monthly basis. This is a good tool to grow your initial balance and continue working towards your short-term savings goals. But a money market account may be a more effective way to meet your other savings goals, such as:
- Intermediate financial goals: Whether you're funding a wedding, prepping for vacation or saving for a car, a money market account can help you make progress. You can use a money market account alongside specialized accounts to save for a home or your child's college tuition.
- Emergency funds: If you have a rainy-day fund you'd like to grow even more, a money market account can help you save for the future without drastically changing your habits. Plus, if the account has withdrawal restrictions, you may be less likely to dip into it for other expenses, keeping your money safely tucked away for when you need it most.
- Supplemental retirement savings: In addition to contributing to your 401(k) and an individual retirement account(IRA), consider using a money market account to set aside more funds for retirement. If you've already maximized your yearly contribution to your traditional IRA, Roth IRA or 401(k), a money market account could help you continue to grow your nest egg.
Money market accounts vs. savings vs. CDs: Which one do you choose?
All three options can help you grow savings through interest growth, but the choice comes down to their particular features and perks. Let's compare:
| Money market accounts | Savings accounts | CDs | |
|---|---|---|---|
| Interest rate | Usually higher rates than savings, but lower than CDs | Usually the lowest, but it depends on the bank or credit union | Usually the highest, as you agree to keep the money in the account for several months or years |
| Ability to withdraw or deposit money | Yes, with possible monthly limits on withdrawals | Yes, with possible monthly limits on withdrawals | No, usually a one-time deposit for a set period of time |
| Early withdrawal penalties | No | No | Yes, a portion of interest earnings |
| Checks and ATM access | Yes | No | No |
| Minimum account balance | High, usually $2,500 | Low, might be $0 | Around $1,000, but depends on the CD |
With these differences in mind, consider an example savings scenario: Jamal has $100,000 in cash for several different goals. He wants to buy a house next year and would like to earn as much interest as possible until then. He puts $60,000 in a one-year CD with a 3% interest rate, which earns him another $1,800 for the down payment.
Jamal puts another $37,000 in a money market account with a 0.5% interest rate. It earns about $185 a year in interest. He can tap into his balance as needed with checks and transfers to his checking account. He also wants to go on vacation in a year and doesn't want to be tempted to spend that money. He puts $3,000 in a separate savings account to earn interest for this specific goal.
Overall, a money market account makes the most sense if you have a large cash balance and want to earn interest while maintaining easy access to your money through checks, transfers and ATM withdrawals.
Money market account FAQs
Money market accounts are safe. Since they're deposit accounts, they qualify for FDIC insurance. They also typically pay an interest rate your financial institution guarantees. Your balance will grow over time and can't lose value, unlike an investment.
Money market accounts are equally as safe as other bank accounts like savings accounts or checking accounts. The only difference is that the account might have a higher minimum balance requirement. If your balance falls below this limit, you could owe a monthly fee.
A money market account can be safer than investing in a mutual fund. These investments depend on the stock market's performance, so you can gain or lose money on any given day. In exchange, mutual funds can have a higher long-term return than a money market account.
Money market funds aren't the same as money market accounts. While money market accounts are deposit accounts, money market funds (also called money market mutual funds) are investments.
The FDIC insures money market accounts, while money market funds aren't FDIC-insured. Also, you typically can't access money market funds with debit cards or checks.
Yes, you can add to a money market account at your convenience. Financial institutions typically don't limit deposits into these accounts — it's the same as adding money to a checking account or savings account. Adding money regularly could be an effective way to build your savings, especially since money market accounts often pay a higher interest rate than checking and savings accounts.
Yes, the interest earnings from money market accounts are taxable. Your bank or credit union will send you an annual statement showing how much you earned. You must report this amount as taxable income to the government when preparing your taxes. This is the same as interest earnings from any deposit account.
Yes, a money market account usually has a minimum balance. These accounts require a higher minimum balance than checking and savings accounts in exchange for paying more interest. The minimum depends on which financial institution you use, but it's typically at least $2,500. You could owe a monthly maintenance fee if your balance falls below the minimum.
A Roth IRA is not a money market account. A Roth IRA is a retirement account to invest and save money. As long as your money stays in a Roth IRA, you don't owe income tax on your investment gains and earnings. You could use a Roth IRA to invest in money market funds to earn a safe return. However, a Roth IRA isn't a deposit account and doesn't give you convenient access to your money like a money market account.
Should you consider a money market account?
With this primer, you can likely see the value of money market accounts. But with any type of savings account, it's important to do your research. Review any requirements before you park your cash, such as minimum deposit, balance requirements, withdrawal limits and fees. Learn more about money market accounts at Citizens.
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