Money Market Account: How It Works and How It Differs From Other Bank Accounts

What Is a Money Market Account (MMA)?

The term money market account (MMA) refers to an interest-bearing account at a bank or credit union. Sometimes referred to as money market deposit accounts (MMDA), money market accounts have some features that are not found in other types of accounts. Most money market accounts pay a higher interest rate than regular (passbook) savings accounts and often include check-writing and debit card privileges. They may also come with restrictions that make them less flexible than a regular checking account. They are important for calculating tangible net worth.

How Money Market Accounts (MMAs) Work

Money market accounts are financial products that are offered to customers at traditional and online banks and at credit unions. They give account holders some of the key benefits of a savings account while providing them with the features of a checking account, including:

• Interest: Like savings accounts, MMAs allow account owners to earn interest on their balances. The interest rate offered is normally higher than a traditional savings account. The interest rate, though, tends to be variable, which means it fluctuates as market conditions rise and fall.
• Debit Cards: Some banks include a debit card with the account, which allows owners to use automated teller machines (ATMs) to make deposits, withdrawals, and transfers.
• Check-Writing: Along with debit cards, clients may also be able to write checks against their account balances.

Banks often require a minimum initial deposit in order to open an MMA and balances must be maintained over a certain threshold while they are active. Banks may impose a service charge if the balance falls below that minimum amount.

Money market accounts are suited for individuals who want to earn more interest than they would with a savings account with short-term goals in mind. As such, an MMA may be a good idea if you're saving up for a specific purchase, such as a vacation, the down payment for a car, or for a rainy day or emergency fund. They are not intended for long-term purposes like retirement.

History of Money Market Accounts (MMAs)

Until the early 1980s, the federal government placed a cap or limit on the amount of interest that banks and credit unions could offer customers on their savings accounts.

Many institutions gave out small appliances (such as toasters and waffle irons), and other incentives to attract deposits because they couldn’t compete with money market mutual funds when it came to interest rates.

Introduced in the 1970s, money market mutual funds are sold by brokerages and mutual fund companies. Under pressure from the banking industry, Congress passed the Garn-St. Germain Depository Institutions Act in 1982. This new law allowed banks and credit unions to offer money market accounts that paid a “money market” rate, which was higher than the previous capped rate.

Advantages and Disadvantages of Money Market Accounts (MMAs)

There are advantages and disadvantages to having a money market account, especially when you compare them to other types of accounts.

Their advantages include higher interest rates, check-writing, and debit card privileges. Banks and credit unions generally require customers to deposit a certain amount of money to open an account and to keep their account balance above a certain level. Many impose monthly fees if the balance falls below the minimum.

These accounts also provide federal insurance protection. Accounts held at banks are insured by the Federal Deposit Insurance Corporation (FDIC) while those held at credit unions are insured by National Credit Union Administration (NCUA). The FDIC and NCUA cover certain types of accounts, including MMAs, up to $250,000 per depositor per bank. Multiple insurable accounts at the same bank (checking, savings, certificate of deposit) count toward the $250,000 insurance limit. Joint accounts are insured for $500,000.

Potential disadvantages include limited transactions, fees, and minimum balance requirements.

Money Market Accounts (MMAs) vs. Savings Accounts

One of the attractions of money market accounts is that they offer higher interest rates than savings accounts. For example, the average interest rate for an MMA in May 2022 was 0.08% while the average savings account paid about 0.07%.

When overall interest rates are higher, as they were during the 1980s, 1990s, and much of the 2000s, the gap between the two types of accounts will be wider. Money market accounts can offer higher interest rates because they're permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, which savings accounts cannot do.

The interest rates on money market accounts are variable, so they rise or fall with inflation. How that interest is compounded—yearly, monthly or daily, for example—can have a substantial impact on the depositor's return, especially if they maintain a high balance in their account.

Unlike savings accounts, many money market accounts offer some check-writing privileges and also provide a debit card with the account, much like a regular checking account.

Money Market Accounts (MMAs) vs. Checking Accounts

Money market and checking accounts share some basic characteristics—the same way they do with savings accounts. Account-holders can make unlimited deposits. Some of them even offer debit cards, which allow account owners to make point-of-sale (POS) transactions. They can also write checks against an MMA, too.

In April 2020, the Federal Reserve lifted restrictions set for accounts like MMAs under Regulation D. Prior to this, depositors were limited to a total of six transfers and electronic payments per month. The types of transfers affected were pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers. Depositors who exceeded the limits were fined.

Although the rules were amended under federal regulations, some banks may still impose limitations and restrictions on how their MMAs may be used. As such, it's important to check with your financial institution about the rules.

Money Market Accounts (MMAs) vs. Mutual Funds

Unlike the various bank and credit union accounts described above, money market mutual funds, offered by brokerage firms and mutual fund companies, are not FDIC- or NCUA-insured. (Banks may also offer mutual funds, but they aren't insured, either.) However, because they invest in safe short-term vehicles such as CDs, government securities, and commercial paper, they are considered to be very low risk.

Both money market accounts and money market mutual funds offer quick access to the depositor's cash. The companies that offer them, however, can place limits on how often depositors can make withdrawals or redeem shares. Others may require that any checks they write be for over a certain amount. The returns on money market mutual funds tend to be higher than those on money market accounts.

The table below compares some of the common features found in money market accounts and other types of deposit accounts. Because interest rates and other provisions can vary from one financial institution to another, it's worth shopping around.

Source: Investopedia

Alternatives to Money Market Accounts (MMAs)

Banks and credit unions offer many types of accounts, some with features that can make them competitive with—or superior to—money market accounts.

Passbook Savings Accounts

Unlike money market accounts, regular savings accounts typically have no initial deposit or minimum balance requirements. They also pay interest, although usually not as much as a money market account. Like money market accounts, passbook savings accounts are FDIC- or NCUA-insured. Check with your bank to see if there are any restrictions on withdrawals.

High-Yield Savings Accounts

Many banks and credit unions also offer high-yield savings accounts and, depending on the institution, the interest rate may be better than on their money market accounts. High-yield savings accounts are also FDIC- or NCUA-insured. A potential downside compared with money market accounts is that they may have more rules, such as requiring direct deposits.

Regular Checking Accounts

Checking accounts have one big advantage over their money market cousins—unlimited transactions, including checks, ATM withdrawals, wire transfers, and so forth. They are also FDIC- or NCUA-insured. Their main disadvantage is that they pay a very low (often zero) interest rate.

High-Yield/High-Interest Checking Accounts

Like high-yield savings accounts, these accounts offer interest rates that rival and sometimes exceed those of money market accounts. They also share the high-yield savings accounts' principal weakness, which is that they may have more complicated requirements, such as a minimum number of debit transactions each month.

They also impose a cap—for example, $5,000—above which the high-interest rate does not apply. In other respects, high-yield checking is like regular checking, with unlimited checks, a debit card, ATM access, and FDIC or NCUA insurance. 

Rewards Checking Account

This type of checking account may offer a sign-up bonus and other rewards, such as high yields, ATM fee reimbursements, airline miles, or cashback. The main downside is similar to high-yield checking—notably, high fees unless the depositor satisfies all the rules, which vary by the institution. Otherwise, rewards checking functions like a regular checking account, including FDIC or NCUA insurance.

Certificates of Deposit (CDs)

A CD is like a savings account with a fixed duration, such as three, six, nine, or 12 months, or multiple years up to 10. In exchange for locking in their money for that period of time, depositors generally get a higher rate of interest than they would with a regular savings account. However, if they withdraw their money (or part of it) early, they'll pay a penalty, usually in the form of lost interest.

Some CDs (known as liquid CDs) don’t penalize depositors for early withdrawals but pay a lower rate of interest. CDs are FDIC- or NCUA-insured but typically offer no provision to write checks, withdraw funds with a debit card, or add to the balance after the initial purchase.

Frequently Asked Questions (FAQs)