With interest rates near decade-highs, now is a great time to be a saver. The question is: What savings product is best for you? One option to strongly consider is a money market account, which is a bit of a hybrid between a checking and savings account.
What is a money market account?
A money market account (MMA) is a type of savings account that you can find at many banks and credit unions.
Compared to a standard savings account, MMAs usually require a higher opening deposit and a higher minimum balance. But they tend to pay a higher interest rate and may come with a debit card and check-writing abilities. You’ll still get deposit insurance of up to $250,000 if the account is at a federally insured institution.
“A great use for a money market account is an emergency fund,” said Lawrence Sprung, a certified financial planner at Mitlin Financial in Hauppauge, New York. “You’ll want the ability to immediately access that money in the case of an emergency and you don’t want a situation where the money you take out is worth less than what you put in.”
Pros of a money market account
A money market account can be appealing if you want to store your money in a place that’s readily available and offers a return on your balance.
Accessibility
Some types of savings accounts, such as certificates of deposit (CDs), penalize you for getting to your funds before the maturity date. But money market accounts typically allow you to withdraw money using whatever method is most convenient for you. Depending on the account, you may be able to use a debit card, write checks, withdraw money at an ATM and electronically transfer money to a linked account.
Competitive APYs
Money market accounts make it easy to pull out your money, but you can also earn a return on your balance. MMAs pay interest, often more than standard savings accounts, which makes them great for short-term savings.
The exact amount you earn depends on the financial institution, your annual percentage yield (APY), any fees involved, your balance and how often the interest compounds. Generally, an account with a higher APY and no fees helps your money grow faster over time.
Deposit insurance
If your bank is insured by the Federal Deposit Insurance Corp. (FDIC), then your money market account is protected against potential bank failure. The National Credit Union Administration (NCUA) offers similar insurance at credit unions. Both the FDIC and NCUA insure up to $250,000 per institution, per account type and per person.
When you invest in brokerage accounts, IRAs and 401(k)s, you don’t receive this type of protection.
Cons of a money market account
While money market accounts are a great option for your short-term savings goals, there are drawbacks to consider.
Interest rate may change
Banks and credit unions can change your MMA interest rate at any time, so your earnings aren’t entirely predictable. Your financial institution can also set tiered rates, where you get a lower APY on smaller balances and vice versa. That can be great if you have a lot of money to park in savings. But it’s a less-attractive feature if you have a smaller balance or you plan to make a lot of withdrawals.
Minimum balance requirements
Banks and credit unions may require you meet a minimum deposit amount to open the account and then require that you maintain a minimum balance to keep the account open. Each financial institution has its own rules, so one might require just $1 while another can require $10,000 or more. Dip below the minimum balance, and you may have to pay a fee or lose the account.
Fees
Banks and credit unions may charge monthly maintenance fees to keep your account open. Some accounts waive the fee if you meet a daily balance or direct deposit requirement, but not every institution has a work-around. Any fees you have to pay will eat away at the money you earn.
Withdrawal restrictions
In the past, all money market accounts were subject to federal Regulation D limits, which capped convenience withdrawals at six per month. The government lifted the limit indefinitely, but individual banks and credit unions can choose to impose their own restrictions. If you go over the limit, you may have to pay a fee or close the account.
Money market account vs. savings account
Money market accounts and standard savings accounts are “almost identical,” Sprung said. Both are deposit accounts that may come with minimum balance requirements, monthly fees and withdrawal limits, and both types of accounts often pay interest.
Just a few key differences set them apart. Money market accounts are designed to give you a way to use your money, so they typically come with checks and debit cards. Standard savings accounts usually don’t offer these benefits. Also, they typically set one interest rate for the entire account balance instead of offering tiered rates. Money market accounts also usually require higher opening deposits, and pay higher yields.
Money market account vs. money market fund
While the two have similar names, money market accounts and money market funds are very different. A money market fund is a type of mutual fund that invests in short-term debt securities and pays regular dividends to its investors. You can buy them at brokerage firms and fund companies, and they’re generally less risky compared to some other investments, such as stocks.
A major difference between the two is that money market accounts are federally insured, while money market funds are not.
“Money market accounts are good for getting your assets back with a decent interest rate,” Sprung said. “But in most cases, once you have that longer-term time horizon, you’ll be better off using some kind of investment portfolio.”
Frequently asked questions (FAQs)
Generally, it’s worth having a money market account to keep your emergency fund or other money that you might need in the short term. These accounts pay interest and come with deposit insurance, and they offer several ways to access your cash.
You won’t lose money with a money market account as long as it’s at a federally insured institution and your balance is under $250,000.
If your account is federally insured, you should keep your total deposit balance at that institution under the deposit limit, which is typically $250,000. But you should also consider whether your money can earn more in an investment account.
Any interest is taxable in the year you earn it. In January of the following year, your bank or credit union should send you a Form 1099-INT if you earned more than $10 in interest during the previous tax year. Report the interest on your federal income tax return and potentially your state tax return.
