Money market account definition
A money market account is a type of interest-bearing account offered by financial institutions. These accounts combine features of both savings and checking accounts. An MMA’s yield is often comparable to a high-yield savings account, and it may also come with a debit card and check-writing privileges, similar to a checking account.
As with checking and savings accounts, money market account balances up to $250,000 are protected by FDIC insurance. These accounts can have the same type of transaction limits as savings accounts, depending on the financial institution, so they’re not always fit to be a replacement for an everyday checking account.
How do money market accounts work?
Money market accounts work in a way that’s similar to savings or checking accounts. Upon depositing funds into the account, you will be paid an interest rate higher than both traditional savings and checking accounts. You may also receive a debit card and checkbook and the same spending privileges as a checking account.
The interest typically compounds daily and is paid out in the account monthly. As with traditional savings accounts, these accounts can have withdrawal limits imposed on them, though these will vary by institution.
These accounts will often require account holders to maintain balance minimums, with potential fees being assessed if the account drops below that threshold.
How to choose a money market account
The most important things to look for when choosing a money market account are:
- Interest rate: Compare several money market accounts to choose the one with the most competitive annual percentage yield (APY).
- Minimum deposit requirements: Many banks require a higher minimum deposit for a money market account than a traditional savings account.
- Fees: Monthly maintenance fees and minimum balance fees can eat into your savings. Avoiding MMAs that charge exorbitant account fees will help you save even more.
- Access: Some banks limit the number of monthly withdrawals that can be made from a money market account. Check to see how often you can access the account and if that fits your anticipated needs.
How to open a money market account
The process of opening a money market account is like the process of opening a savings account. Here are some suggested steps to take when opening an MMA.
- Compare financial institutions. Look at different banks or credit unions that offer MMAs. Consider variables like whether or not an institution has branches near you and if it has a large ATM network.
- Review terms and conditions. It’s always a good practice to review terms and conditions before entering into any agreement. This would be the time to consider things like APY, withdrawal limits, minimum balance requirements and fees.
- Gather everything you’ll need to open the account. Required documents and information will likely include your Social Security number and proof of your current address, such as a utility bill or other mail. Most banks will also require a form of photo identification, such as a driver’s license, to verify your identity.
- Apply. Most money market accounts can be applied for online, in person at a branch or over the phone.
Once you’ve followed these steps, submitted the necessary documentation and been approved, it’s time to fund the account. You can usually do this by electronic transfer or physical deposit — whichever is easier for you. You will need to deposit at least the minimum amount (if one applies).
Alternatives to money market accounts
If a money market account isn’t the right option for you, there are several banking alternatives you can consider, including:
- Certificates of deposit: A CD is another type of account where your money can grow slowly with little risk. CDs typically offer the highest interest rates of any savings product. However, money deposited in a CD is essentially frozen in the account for the duration of the CD term. If you need to withdraw money before the term ends, you’ll likely incur a penalty.
- High-yield savings accounts: The best high-yield savings accounts often have interest rates more than 10 times the average savings account rate. These accounts are often subject to the same withdrawal limits as traditional savings accounts, and they typically do not come with check-writing or a debit card. They may also require a high initial deposit.
- Treasury bonds: Treasury bonds are publicly traded bonds backed by the U.S. government. Depending on economic conditions, their yields may be higher or lower than CDs, MMAs and high-yield savings accounts. However, Treasurys do not provide the same readily available access to funds as a savings account or MMA. As with stocks, Treasurys can be bought and sold in a brokerage account.
» MORE: Best online savings accounts
FAQ
Can you lose money with a money market account?
While the risk is quite low, you can lose money in a money market account if excessive fees eat into your savings. If the fees exceed your interest accumulation, you will lose money.
Do I have to pay taxes on a money market account?
Yes, you must pay taxes on the interest you earn in a money market account. The interest earned in a money market account is taxed as normal income and should be added to your gross income to determine your marginal tax bracket.
Money market account vs. savings account — what’s the difference?
A money market account is a type of interest-bearing account with some distinct differences from a traditional savings account. Money market accounts have higher yields than traditional savings accounts and offer some of the spending capabilities of checking accounts.
Bottom line
A money market account can be a useful tool to help you safely save money. However, there are several things to keep in mind when deciding whether to open one. If you choose to open a money market account, be sure to shop around to find the one that’s best for your needs and goals.
Article sources
- Consumer Financial Protection Bureau, “ What is a money market account? ” Accessed March 10, 2023.
