Money Market Account (MMA): Turbocharge Your Savings With This Insured Account

With interest rates for traditional savings accounts near all-time lows, a money market account can be a great way to earn more on savings without some of the restrictions that CDs or other options can bring.

You might also see a money market account (MMA) referred to as a money market deposit account (MMDA), which describes the account type more accurately and helps to avoid confusion with other financial products.

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What is a money market account (MMDA)?

A money market account is a type of savings account that typically pays a higher rate of interest than a traditional savings account and deposits are federally insured by the Federal Deposit Insurance Corporation (FDIC).

Often, you’ll have convenient access to money market savings through a debit card or checking privileges.

However, access to your funds may be effectively limited in other ways, such as minimum account balance requirements or federal rules that govern the number of allowed transactions.

While rates for money market accounts tend to be higher than those of traditional savings accounts, the difference in earnings isn’t always big. It pays to shop around.

It’s also common to find tiered rates, which means larger balances may earn a higher annual percentage yield (APY), with as many as 10 APY tiers offered by some banks.

How does a money market account work?

First, it’s important to make the distinction between a money market account and similarly-named money market funds.

A money market fund is an investment vehicle that is not insured by the FDIC, which can put your principal at risk.

MMDA anual percentage yield

A money market account works similarly to a traditional savings account. You earn interest on the balance in your account, which is usually advertised as an APY or annual percentage yield.

An APY provides a convenient way of understanding the interest rate for your account because it includes a calculation for compounding frequency, which can vary by bank.

The most common structure for compounding is for banks to compound interest daily and pay interest monthly.

The APY provides a way to compare rates accurately. In effect, as you earn interest on your savings, your interest will earn interest as well, compounded daily, monthly, or annually, depending on the bank or the type of account.

The APY gives an easy-to-understand value to this chain of calculations so you can easily compare rates for other money market accounts or even other savings vehicles, like CDs or high interest savings accounts.

How your money is used

Banks and credit unions lend out the money deposited in money market accounts.

This is also true of deposits made to traditional savings accounts, but often traditional savings accounts don’t provide banks with much money to lend due to the lower balances in savings accounts.

The minimum balance requirements common to money market accounts help ensure a steady stream of funds that the bank can lend to creditworthy borrowers, which is why money market accounts pay higher rate of interest.

MMDA accounts are insured by FDIC and NCUSIF

A money market account is a type of savings account. It’s therefore covered by FDIC insurance up to $250,000 in deposits per person per bank. FDIC deposit insurance expands to $500,000 for joint bank accounts.

Money market accounts offered through credit unions are usually insured by the National Credit Union Share Insurance Fund (NCUSIF), following the same insurance allowances as FDIC-insured accounts: $250,000 per person or $500,000 for joint accounts.

What should you look for when opening an money market account?

Before comparing account details, it’s important to understand your goals for the account.

Money market deposit accounts come with some restrictions which can make them less than ideal for certain savings goals.

In particular, the minimum balance requirements and tiered APY can make a money market account a better option for surplus savings as opposed to savings you may need to access frequently.

Initial deposit

In most cases, a money market account requires an initial deposit to open the account, often $1,000 to $2,500 — but sometimes higher.

For some households, the initial deposit requirement can be a deciding factor and might make the money market account offered by one bank more appealing than that of competing bank.

If the initial deposit requirements is too high, you can also consider opening a high-yield savings account, which are online accounts that often have lower initial deposit requirements than money market accounts.

Minimum balance

Most money market accounts have a minimum balance requirement which can affect your account in two ways.

First, accounts that fall below the minimum balance requirement may be subject to a monthly service fee, which is often about $12 to $15 for each month that your account falls below the minimum balance requirement.

These fees can be enough to negate any interest earnings for the month. It’s also common for money market accounts to pay a lower interest rate for lower balances.

You might find as many as ten different APY tiers, each corresponding to a balance range.

For example, a balance of less than $1,000 might pay 0.5% APY whereas a balance of $1,000 to $1,999 might pay 0.75% APY.

Interest rate

By definition, all interest-bearing accounts, including money market accounts, pay interest on deposits.

Unlike certificates of deposit (CDs), most of which provide a fixed rate on deposits, money market accounts use variable interest rates.

The rate you earn on your money could change multiple times within a year.

In practice, rates at tend to change more gradually, so you’ll often have time to weigh other options if you see interest rates trending downward.

However, banks and credit unions more commonly advertise the annual percentage yield rather than the interest rate. The APY is the number to watch.

Deposit options

Your deposit options can vary depending on whether you choose a money market account from an online provider or your local bank.

In nearly all cases, you should be able to deposit funds through an ACH transfer from another account or by check.

Most banks also support deposits by wire transfers, although it’s likely you’ll pay a fee — and possibly more than one fee for wire transfers.

Money market accounts with a local brick-and-mortar bank usually accept cash deposits as well.

Many money market accounts also accept direct deposits, which makes saving more convenient.

Some consumers even use a money market account as a replacement for a checking account and have paychecks deposited directly to their money market account or move money that was directly deposited into their money market account to a separate checking account.

The direct deposit option can be a great way to pay yourself first by moving only the money you’ll need to a separate account you use regularly.

Accessing money

Money market accounts can be more convenient than some other types of savings vehicles, such as high yield savings accounts, because they tend to offer more ways to access your money.

Debit cards are a common feature for money market accounts and you’ll typically have check writing privileges as well, although the number of allowed transactions, including checks, are limited.

You can also access money using an ACH transfer to another account. If you choose a local bank or credit union for your money market account, withdrawals can be made in person.

Be aware that debit card transactions can result in fees, especially if you access funds from an ATM that does not belong to your bank.

Some money market accounts reimburse ATM fees up to a $10 per month, although the reimbursement limit can vary by bank and some banks may not reimburse fees at all.

Checks

Money market accounts offer check-writing privileges. If you don’t write many checks, a money market account that offers checking privileges can be used as a substitute for a checking account.

Most households will want to maintain a separate checking account as well, however, because check-writing privileges are limited to a handful of transactions.

Debit

Choosing a money market account that offers a debit card brings you additional access to your money and can be a handy way to make purchases or withdraw funds, especially when you can’t use a check to pay for a product or service.

Expect to pay a fee with most money market accounts if you use an ATM machine outside the bank’s network.

Number of transactions

Federal regulations limit the number of allowed monthly transactions in a money market account, which can make a money market account a less-than-perfect solution as a replacement for a checking account.

Currently, money market accounts are limited to 6 transactions per month. Checks, transfers, and ATM transactions all count toward the transaction total.

If you exceed 6 transactions per month, your bank may charge you additional fees, convert the account to a checking account, or close the account due to transaction limit overages.

Maintenance fees

Many money market accounts charge a monthly maintenance fee, which is usually about $12 to $15.

However, most banks will waive the maintenance fee if you maintain a minimum balance.

For example, one well-known bank waives the monthly maintenance fee if you maintain a daily balance of $2,000 or more.

Be sure to understand the minimum balance requirements for your money market account and when maintenance fees apply.

In a month in which you were charged maintenance fees, the fees can outpace the interest you earn, leaving you with an account balance lower than the previous month.

How is interest calculated on money market accounts?

In most cases, interest on money market accounts is compounded daily and credited to your account monthly.

For example, on a money market account that pays 2.0% interest, each day you would earn 0.0054795% interest based on your balance.

The total amount of daily interest earnings are usually added to your account in a lump sum monthly.

Compounding frequency can vary by bank, however, so it’s important to compare accounts using the annual percentage yield, which factors in compounding frequency that allows you to make a fair comparison between accounts from different providers.

What is the difference between MMDAs and MMMFs?

Despite their similar names and often similar interest-income goals, money market deposit accounts and money-market mutual funds are very different types of accounts.

One of the primary differences between a money market account and a money market fund is that money market accounts are covered by FDIC insurance up the legal limits.

Money market accounts offered through a credit union are insured by NCUSIF, which is a government insurance fund for credit union deposits that closely parallels FDIC insurance.

A money market mutual fund, by comparison, is not insured, which means your deposits can be at risk. In reality, your deposit with a money market mutual fund is really an investment instead of a savings deposit.

While both money market accounts and money market funds pay a yield based on your account balance, with a money market fund, there’s a possibility that your principle can be reduced based on the performance of the fund’s investments.

This situation is unlikely with a money market account. In fact the primary risk with a money market account is that maintenance fees or other fees outpace the interest you earn on your account in a given month, thereby reducing your account balance.

Money market accounts vs. other types of savings accounts

Money market accounts have some intriguing advantages but may not always be the best solution, depending on your savings goals. Here are some examples of other savings vehicles and how they might compare to a money market account.

MMA vs. traditional savings account

Generally, money market accounts pay higher interest rates than traditional savings accounts.

However, this isn’t always the case and it isn’t unusual to find money market accounts that pay rates very similar to traditional savings accounts.

 If you choose a money market account with a higher yield, you’ll earn more than with a traditional savings account and also enjoy some additional benefits such as check writing privileges.

MMA vs. high yield savings accounts

In some cases, you might have a tough time distinguishing between a money market account and a high-yield savings account outside of the obvious branding differences.

Check writing privileges are nearly universal with money market accounts, where is high-yield checking accounts don’t always offer this benefit.

Money market accounts are also easy to find. You’ll find money market account options at nearly every bank or credit union, whereas high-yield savings accounts are largely available only through online banks.

APY can also be an important comparison between money market accounts and high-yield savings accounts.

High-yield savings accounts tend to live up to their name and pay a usually pay a higher yield.

Money market account yields can range from a small fraction of a percentage up to about 2% APY.

MMA vs. CDs

Certificates of deposit (CDs) or also known for strong yields, sometimes higher than those offered through money market accounts.

With a money market account, your yield can change throughout the year because interest rates are variable.

CDs usually pay a fixed rate in exchange for a time commitment.

To earn the best rates with CDs, you often have to keep the CD for 1 year or even as long as 5 years.

This longer time commitment can bring an element of risk to certificates of deposit if interest rates are on the rise.

With a money market account, if interest rates rise, the yield for your money market account is likely to rise as well.

Money market accounts also provide more convenient access to your savings when compared to a CD.

MMA vs. MMMF

A money market mutual fund (MMMF) is a type of mutual fund that pays a yield based on your investment balance.

Money market funds can play a valuable role but always aren’t a plug-in replacement for a money market account for a number of reasons.

You’ll have the ability to write checks as needed with a money market fund, bypassing the transaction restrictions found with money market accounts.

However, most money market funds require that you withdraw a minimum amount, which can lead to withdrawing more than you need.

Additionally, money market funds are not federally insured, which can put your investment at risk.

Typically, money market funds are invested in low-risk investments, which helps minimize the risk to your principal.

It is possible for the value of a fund to fall below its goal, however, a process called “breaking the buck”.

In a well known case from the 90’s, the SEC forced a liquidation of a money market fund and investors received 94 cents on the dollar of their investment.

In 2008, another money market fund broke the buck, affected by its investments during the financial crisis.

By contrast, a money market account is fully insured up to $250,000 per depositor per institution, which eliminates investment risk.

Common Q&A about MMAs:

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Is a money market account worth it?

A money market account can have some attractive advantages, such as higher yields, check writing privileges, and the convenience of local banking — if you choose a local bank.

You’ll have to shop yields carefully, however. In many cases, money market account yields may not be much higher than the yields for traditional savings accounts.

If your goal is to maximize your yield, an online high yield savings account can also be a great alternative.

Who offers money market accounts?

Money market accounts are available through banks and credit unions, but you aren’t limited to local banks.

Many banks offer accounts online which expands your options and can help you find an account that meets all your needs in regard to features and rates.

How do I choose a money market account?

Weigh your priorities carefully before choosing a money market account.

Yields tend to attract the most attention but other restrictions, like minimum balance requirements, money access options, and fees should be considered as well.

If you think you’ll need frequent access to your savings, for example, an account with a lower minimum balance requirement may be a better fit, even if the yield is lower.

Do money market accounts pay interest monthly?

Most money market accounts pay interest monthly but compound daily. Interest rates can be harder to find, however.

Banks usually advertise the annual percentage yield, which includes the monthly interest rate and compounding frequency in the calculation.

How liquid is a money market account?

You have complete access to your funds in a money market account but there are some considerations to think about before withdrawing.

Your account may have a minimum balance requirement and falling below that amount can lead to fees and/or a reduced APY.

You’re also limited to 6 transactions per month.

If you’ve already used your 6 transactions, you may effectively lose liquidity in the account and be forced to wait until the next month to access funds.

Can you lose your money in a money market account?

Money market accounts are federally insured for up to $250,000 per depositor per institution. Joint accounts are insured for up to $500,000. Amounts above the insured limits are at risk.

In almost all cases, deposits in money market accounts are insured by the federal government.

However, fees charged to your account can sometimes be higher than the interest earnings for the account, leading to a loss of principal.

Is there a penalty for closing a money market account?

Money market accounts can be closed without a penalty.

If your balance is low, minimum balance requirements and maintenance fees can create a situation where the best solution is to close the money market account and move the funds to another type of account.

Do you pay taxes on money market accounts?

Interest earnings on money market accounts are taxable as regular income.

Choose a money market account for your long-term savings goals

A money market account can be a good choice as a savings account with a longer-term goal.

If you need more frequent access to your money, an interest bearing checking account may be a better option or a savings tool you can use in combination with your money market account.

Where money market accounts shine is in their wide availability.

Rates can vary dramatically from bank to bank, however, so it’s important to shop around and even consider online options if you want to earn the best rates.

High-yield savings accounts or high yield checking accounts can also be a viable option for long-term savings needs, but you won’t find the same amount of choices you’ll find with money market accounts.

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