Money market accounts are typically more robust savings accounts that yield higher interest rates while allowing the consumer to write checks and pay for purchases with a debit card. Some savers may prefer a money market account to a traditional savings account.
The interest rate from money market accounts fluctuates depending on what current rates are available in the money market. However, money market accounts may require a higher balance than a traditional savings account in order to skip paying a monthly fee.
"A money market account works best for those who think they might need access to their funds and want to earn the best yield with their bank," says Melissa Eggleston, chief deposit officer at NBKC Bank in Kansas City, Missouri.
What is a money market account?
A money market account resembles a savings account in many ways. These accounts are an option for consumers who are seeking a higher interest rate. While some savings accounts have a low or no minimum to either open the account or maintain it without paying a monthly fee, money market accounts could require both.
"On the surface, a money market account seems a lot like a standard checking or savings account," says Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling, a Washington-based nonprofit organization, and a U.S. News contributor. "Checks can be written, debit cards can be used and the money is deposited in a bank or credit union."
The key difference is that a money market account bases the interest rate on the available rates in the money market – investing in the likes of certificates of deposit and government securities – instead of profits earned on loans issued by the bank, he says.
One of the benefits of a money market account is the possibility for a higher yield than what a standard savings account provides. Interest rates on a money market account can be as high as 2% annual percentage yield, while a savings account may be up to 1 percentage point lower, McClary says.
Another benefit is that money market account deposits are federally insured, which is not the case for a money market mutual fund.
Shopping around can yield the highest interest rates, and online-only banks often provide the best rates because of less overhead. In fact, some high-yield savings accounts offered online carry better APYs than money market accounts.
Benefits of a money market account
The benefits of a money market account may also include a debit card and checks, allowing you to pay bills and buy items in stores and online. However, just like with standard savings accounts, money market accounts are subject to federal Regulation D, which limits most withdrawals and transfers to six per month.
Though some less convenient transactions – those made at an ATM or via a bank teller – don't count toward the six, if you exceed the limit, your bank may charge you a fee or, if you persist in going past the limit, convert your money market account into a checking account.
In certain markets, money market accounts can be a better option for accumulating "'cashlike' assets, than a traditional savings account," says Daren Blonski, managing principal of Sonoma Wealth Advisors of California.
"Generally, money market rates tend to be more market-rate sensitive than savings accounts," he says. "When interest rates rise, money market accounts also tend to increase. You get the benefit of interest rates going up."
When should you not use a money market account?
A money market account's purpose is to encourage savings. Since Reg D limits the total number of transactions, this type of account is not meant for paying bills on a regular basis or for making daily purchases.
These accounts are not suitable for long-term planning, such as saving for retirement or to pay college tuition, because the interest accumulated is taxed. Long-term savings should be socked away in a 401(k) or individual retirement account that provides tax benefits.
"It's probably not a good idea to consider a money market account when requiring more frequent access to funds or when needing a higher rate of return for a long-range savings goal, such as retirement or education," says McClary. "There are much more competitive products designed to meet those needs."
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