A money market account (MMA) combines the benefits of a checking and savings account, representing a hybrid between the two account types that offers a higher interest rate and flexible access to your funds.
MMAs are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per depositor and are especially helpful when it comes to saving to meet short-term financial goals, to create an emergency fund or for storing cash that you may need to eventually use. Funds tend to be invested in safe, short-term securities, like Treasury bills and CDs.
Other important factors about MMAs are that they often have monthly activity limits and may have higher minimum balance requirements compared to conventional checking and savings accounts.
How Money Market Accounts Work
MMAs represent a hybrid between checking and savings accounts, but their operation differs significantly from conventional accounts. Here’s an overview:
- They earn interest at a variable rate, which is often compounded daily and paid out monthly. Because the rate is variable, it fluctuates based on market and economic conditions.
- Credit unions invest MMA deposits in low-risk, liquid securities to help generate higher returns for their members.
- Most financial institutions require a minimum balance for MMAs. It’s essential to maintain a minimum balance to earn higher interest rates. Many institutions also offer tiered interest rates to incentivize savings, helping Members earn more interest as they save more.
- To help maintain a low-risk status, many institutions limit the number of MMA withdrawals or transfers that can be made each month. Exceeding the limits may result in penalties or fees.
Money Market Accounts vs. Other Account Types
Money Market Account vs. Savings Account
There are several key differences between MMAs and traditional savings accounts:
- Interest rates: MMAs typically offer much higher interest rates than savings accounts.
- Transactions tend to be limited for MMAs. There’s no limit on transactions for savings accounts.
- MMAs require a higher minimum opening deposit and a minimum deposit to take advantage of all benefits.
- MMAs may come with monthly maintenance fees that are often waived by meeting minimum requirements.
Money Market Account vs. Checking Account
MMAs combine many of the benefits of checking accounts, but offer a significantly higher interest rate (up to 10x higher) compared to the standard checking bank account interest rate of 0.07%. Many of the same differences between MMAs and checking accounts are also present when comparing savings accounts.
Money Market Account vs. Certificate of Deposit (CD)
Consider selecting a CD if you’re looking to lock in your money for a specific term at a fixed interest rate. That’s the biggest difference between CDs and MMAs. MMAs are a hybrid between a checking and savings account, while CDs represent a more high-yield savings option, albeit without the flexibility. While there are transaction limits with MMAs, you can still deposit, withdraw and transfer money up to the limits each month, which is not possible with a term-bound money market mutual fund or CD.
What Are Money Market Accounts Used For?
When does a MMA make sense? You’ll benefit more from an MMA if you have a significant sum of money in the account that you don’t plan to dip into often. Thanks to a higher interest rate (and the potential for tiered interest rates) for MMA accounts, you’ll earn more on your money and make it work harder for you. For this reason, many people use MMAs as emergency funds, to meet short-term savings goals or as a place to park cash between investments.
Benefits of Money Market Accounts
So why should you consider a MMA? Here’s a closer look at the key benefits of these accounts:
- They offer higher interest rates compared to conventional checking or savings accounts, allowing you to earn more on what you put into the account.
- They’re a safe option that’s NCUA-insured at credit unions up to $250,000 per depositor.
- Unlike CDs, they still allow users to access the accounts and make transactions, though the number of transactions is typically limited each month.
Drawbacks and Limitations of Money Market Accounts
Despite the many benefits, there are some limitations to MMAs that you should be aware of. They include:
- Higher minimum balance requirements: At Island Federal, Members can open a Money Market Plus account with a starting deposit of $2,500. Additionally, you may have to deposit even more money to earn the top rates and maximize your return on investment.
- While MMAs are more flexible than a CD, they’re less flexible than checking and savings accounts when it comes to making transactions. Money market accounts tend to be limited to six transactions per statement cycle.
- There’s the potential for monthly fees if balances fall below the minimum account requirements.
- You can expect lower overall long-term returns compared to CDs or other types of investment accounts.
How to Choose the Right Money Market Account
If you’ve determined that a money market account is right for you, you still have some decisions to make. Here are some criteria for weighing MMA options and selecting the fit that’s best for you:
- Compare the basics, like interest rates, balance requirements and fee structures among the bank or credit unions you’re considering.
- Consider your access needs and any transaction limits.
- Evaluate NCUA and FDIC insurance coverage.
Additionally, you’ll want to assess how the account fits within your overall financial strategy and balances with your cash flow needs relative to other deposit accounts and high yield savings accounts.
Start Earning More with an Island Federal Money Market Account
Are you ready to start making your money work harder for you? Consider opening a MMA at Island Federal today. We offer two MMA options — Plus and Gold accounts — and also offer competitive rates, NCUA insurance, no monthly service fees and free online banking so you can make any transactions with ease. Contact us today to open an account or schedule an appointment to learn more about our services.
Frequently Asked Questions About Money Market Accounts
Are money market accounts safe?
Yes, money market accounts are a type of bank deposit account that’s NCUA-insured at credit unions up to the standard legal limit per depositor and per issued bank for each ownership category. The bottom line is that your money will be protected in the event of an issue.
How much money do I need to open a money market account?
This varies based on the financial institution. While some banks have no minimum deposit, other banks require several thousand dollars to open a money market account. At Island Federal, Members can open a Money Market Plus account with a starting deposit of $2,500.
How many withdrawals can I make from a money market account each month?
This can also vary based on the financial institution. However, most allow you to make up to six withdrawals or transfers each month, as this aligns with federal regulations. Some institutions may have higher transaction limits or different policies.
What’s the difference between a money market account and a money market fund?
Money market accounts are federally insured bank deposit accounts that function like a hybrid of a savings and checking account, while money market funds are a type of mutual fund that’s not federally insured. The other key difference is risk level. Money market accounts are insured and considered low-risk investments, while money market funds are not and carry a small risk of market loss.
Can I lose money in a money market account?
While you won’t lose your principal, you could see your balance decrease due to fees or penalties.
Do money market accounts have debit cards?
It depends on the financial institution. Some institutions offer debit cards to facilitate easy and convenient transactions, while others may not. Keep in mind that money market accounts often have transaction limits that can restrict debit card usage.
Are money market account earnings taxable?
Yes, money market account earnings are taxed just like ordinary income at the federal level. State taxes depend on your state and any local jurisdictions. Any interest earned will be documented on the 1099-INT Form, which you’ll need to report when you file your annual tax return.
What happens if my balance falls below the minimum?
If your balance falls below the minimum, you can expect your bank to charge a monthly fee or drop your interest rate. Depending on the financial institution, your account may also be converted to a different type of account or closed completely. Be sure you are familiar with your institution’s specific terms and monitor your balance accordingly.