The Complete Guide to Money Market Accounts

A money market account (MMA) is a special type of bank or credit union savings account with some features not found in regular savings accounts. Most money market accounts pay a higher interest rate than regular savings accounts. They also often include check-writing and debit card privileges. But MMAs may come with restrictions that make them less flexible than regular checking or savings accounts.

History of Money Market Accounts

Until the early 1980s, the government placed a cap or limit on the amount of interest that banks and credit unions could offer customers in savings accounts. Many institutions offered small appliances (such as toasters and waffle irons), along with other incentives to attract deposits as they couldn’t compete when it came to interest rates.

People began putting their savings into higher-interest-paying money market mutual funds (MMMFs), also known as money market funds (MMFs). These mutual funds are sold by banks, brokerages, and mutual fund companies, and are somewhat riskier than money market accounts.

Congress passed the Garn-St. Germain Depository Institutions Act of 1982 under pressure. It allowed banks and credit unions to offer MMAs that paid a money market rate, which was higher than the previous capped rate. Money market accounts are offered at traditional and online banks and credit unions. One of the key features of MMAs, aside from paying higher interest, is the protection of your assets.

MMAs Are Insured Deposits

MMA deposits and earnings at a bank are insured by the Federal Deposit Insurance Corp. (FDIC), an independent federal government agency. The FDIC covers certain types of accounts, including MMAs, up to $250,000 per depositor per bank. This means if you have 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 money market accounts taken out at a credit union, the National Credit Union Administration (NCUA) provides similar ($250,000 per member per credit union) insurance coverage. If you want to insure more than $250,000, the best way to accomplish that is to open an MMA at more than one bank or credit union.

Money market mutual funds, however, aren't insured by the government—even if you take one out at a bank. 

Features of MMAs

Check-Writing and Debit Card

Many money market accounts offer limited check-writing privileges and include a debit card with the account. That makes an MMA a combination savings and checking account, which can be handy if you want to receive a higher interest rate but you only need to access your funds on a limited basis. 

Transaction Limits

Federal Reserve Regulation D limited to six the number of withdrawals and transfers you could make from an MMA each month. The types of transfers affected are pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, check or debit-card payments to third parties, ACH transactions, and wire transfers. That restriction was lifted in April 2020. But some banks still limit the number of times you can make debit transactions or transfers from your MMA.

Liquidity

Both money market accounts and money market mutual funds offer quick access to your funds. However, remember that while the federal government lifted restrictions, your bank still may limit the number of withdrawals and transfers you make from your MMA. Individual banks and brokerages firms also may place limits on how often you can redeem shares in your money market mutual fund.

MMA Fees and Minimums

In addition to transaction limits that your financial institution may impose, money market accounts generally require you to deposit a minimum amount to establish an account. They may also require you to maintain a minimum balance to receive the maximum interest rate.

Both money market accounts and money market mutual funds charge fees. Fees are important to recognize because any service charge that is imposed on your account reduces your earnings or interest. In a money market mutual fund, the main fee is the expense ratio, which is paid to the fund company to pay the fund manager and other operating expenses.

Many MMAs charge a number of fees, including a monthly charge that kicks in if your balance falls below the minimum. Some institutions charge a fee no matter what your balance is, while others waive the monthly fee if you make a regular monthly direct deposit. Minimum deposits, balances, and rules regarding fees vary among financial institutions.

Other fees may include check-writing fees for going over the account’s maximum number of allowed checks in a month, annual account service fees, or a fee if your account falls below a stated minimum balance.

Interest Rates

One of the original attractions of MMAs was the fact that they offered a higher interest rate than savings accounts. And, on average, MMAs do continue to outperform savings accounts. MMAs can offer higher interest rates because they are permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, which savings accounts can't do.

Money market account interest rates (as well as those of most deposit accounts) are variable, meaning they can change with economic conditions. How interest is compounded—yearly, monthly, or daily, for example—can have a substantial impact on your final return, especially if you maintain a high balance in your account. 

Interest Versus Dividends

Dividends (yields) produced by money market mutual funds tend to be slightly higher than the interest earned on money market accounts. However, the return on both varies with the performance of the underlying investments, and neither typically keeps up with inflation. 

Reinvestment

You have the option to reinvest the dividends in your money market mutual fund. Reinvested dividends purchase additional shares in the fund. Interest in your money market account is automatically added to the principal and compounded. Money market mutual funds typically maintain a net asset value (NAV) of $1 per share. As your account grows, the number of $1 shares you own increases. 

MMAs vs. Other Deposit Accounts

Money market accounts aren't the only deposit accounts offered by banks and credit unions. Other accounts may include features (or even interest rates) that make them competitive with—or superior to—money market accounts.

Savings Account

Regular bank or credit union savings accounts pay interest just like MMAs, though the interest paid by MMAs tends to be higher. Some regular savings accounts offer a slightly higher interest rate to compensate for the lack of flexibility (i.e., check writing) offered by MMAs.

Both savings accounts and MMAs are FDIC- or NCUA-insured. Both allow you to make as many deposits as you like each month. Unlike MMAs, however, regular savings accounts typically have no or a very small initial deposit or minimum balance requirement.

High-Yield Savings Account

Banks and credit unions also offer high-yield savings accounts and, depending on the institution, the interest offered may be higher than what you can get with that bank’s MMA. Just like MMAs, high-yield savings accounts are FDIC- or NCUA-insured and may require a higher initial deposit, minimum balance, and maintenance fees, or have penalties if your balance falls below the required minimum.

Regular Checking Account

Checking accounts have one major advantage over MMAs—unlimited transactions (checks, ATM withdrawals, wire transfers, and so forth). They are also FDIC- or NCUA-insured. This makes checking accounts perfect for daily financial transactions, such as writing checks, electronic bill payments, and access to cash through an automated teller machine (ATM). The main weakness of regular checking accounts is that they offer a very low (often zero) interest rate.

High-Yield/High-Interest Checking

This type of checking account—like high-yield savings—offers interest rates that rival and sometimes exceed those found with money market accounts. As with MMAs, these types of accounts come with a requirement to maintain a minimum daily balance and a penalty or fee for falling below that amount. High-yield checking accounts also frequently have a cap—for example, $5,000—above which the high interest rate no longer applies.

Some high-yield checking accounts require you to make a minimum number of debit transactions each month. All these stipulations can make maintaining a high-yield checking account a time-consuming chore. In other respects, though, 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 an impressive sign-up bonus and other rewards, such as high yields, ATM fee reimbursements, airline miles, or cash back. The caveats resemble those with high-yield checking: high fees unless you maintain a stated minimum daily balance, a required minimum number of debit-card transactions per month, mandatory monthly direct deposits, and more, depending on the institution. Otherwise, rewards checking functions like a regular checking account as noted above, including FDIC or NCUA insurance. 

Certificates of Deposit (CDs)

A CD is a timed savings account. In exchange for a fixed interest rate that may be higher than you would get from a regular savings account or MMA, you agree to deposit a set amount for a set term—three, six, nine, or 12 months, or multiple years up to 10. Interest on your CD is compounded daily, weekly, monthly, or annually, according to the terms of your agreement with the bank or credit union.

If you keep the money in place until the CD’s maturity date, you will receive the maximum amount of interest and compounding. If you withdraw your money (or part of it) early, you pay a penalty, usually in the form of lost interest.

Some CDs (known as liquid CDs) don’t penalize you for early withdrawal of principal or interest or both 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 once you purchase the CD.

How To Choose a Money Market Account

Money market accounts are deposit accounts at banks and credit unions that often are considered a great place to hold your money temporarily, especially when the market is volatile and you can't be sure of another safe haven. For the best rates, you may want to start with our list of the best money market accounts. The rate you get should be at least somewhat higher than a regular savings account.

Find out whether MMAs you're comparing come with check-writing privileges and a debit card. Some banks limit the number of transactions that can be made monthly in an account, so research that potential restriction as well.

Where To Open a Money Market Account

The bank where you're already a customer, other online banks, brokerage firms, and credit unions offer money market accounts. Once you've compared and identified one with a favorable interest-rate yield and rules, minimum deposits or balances that align with the amount you have to deposit, you simply need to open an MMA to start saving with this type of account.

Special Considerations

Taxes for MMAs

Interest earned on most MMAs is taxable, even if it is reinvested. If you receive more than $10 of interest in a single year, you will receive a 1099-INT form to use for filing your income taxes. It doesn’t matter if your bank calls the interest dividends. It’s still subject to taxes. If your total interest from all Forms 1099-INT exceeds $1,500, you also must file a Schedule B, listing the name of each institution and the interest received from each.

If your MMA invests in certain tax-free instruments (i.e., municipal bonds), some or all of the interest you earn may not be taxable. If you are not sure about your tax status, seek the advice of a trusted financial advisor. 

Risks and Returns of MMAs

The combination of FDIC or NCUA insurance and low-risk investments makes a money market account one of the safest investments available. The tradeoff, of course, is that MMA interest rates—while higher than those found with regular checking accounts and savings accounts—are much lower than the 8% to 10% historical average return you would receive with securities and other types of long-term investments.

While low-risk investments such as those found in MMAs are considered very safe, they aren't considered viable long-term investments. What MMAs are good for is providing a place to put the money you don't wish to tie up as a long-term investment or principal you don't wish to risk. 

The Bottom Line

The decision to open a money market account involves comparing many factors, and deciding how important each is to you. For example, depending on the interest rate, your main concern about whether to choose an MMA or a CD may be liquidity. Between a money market account and a money market mutual fund, ask yourself whether you are willing to trade security for a potentially higher return, as the money market account is FDIC-insured and a money market mutual fund isn't.

You may want an MMA as a place to park investable funds for quick access when the stock market makes a favorable turn or to cover emergency needs. Regular savings may be appropriate until you accumulate enough to open a money market account or money market mutual fund. If you don’t need to access your funds immediately but still want security, a five-year CD might be a good investment choice for you.