A money market account is a type of deposit account that pays interest on deposits and allows withdrawals with some restrictions.
MMAs are offered primarily by banks and credit unions of all sizes, and can be used for short-term or long-term savings.
Some examples of common uses are:
- Emergency savings
- Money you’re putting away for a large purchase, such as a car or house down payment
- Money that’s not currently invested, but will soon be put into stocks, bonds or some other form of investment
MMAs share many features with standard savings and checking accounts. The main differences are that MMAs generally pay higher interest rates, require higher initial deposits and minimum balances, and limit the number of certain types of withdrawals and transfers.
Certificates of deposit, or CDs, also usually pay higher rates than standard savings or checking accounts. However, unlike MMAs, CDs are term deposits, which can trigger a penalty if you withdraw funds before the term ends. CD terms vary from one month up to 10 years. MMAs don’t have this term feature.
Money market accounts are very different from money market funds. A money market account is a banking instrument. A money market fund is an investment product. Money market funds are a type of mutual fund that invests in cash and cash-equivalent securities.
In order to relieve the confusion, money market accounts may be called money market savings accounts or money market deposit accounts. Including “savings” or “deposit” in the name helps to clarify that the account is not an investment fund.
An MMA is primarily a savings vehicle. After you open this type of account, you normally can make unlimited additional deposits. Many banks and credit unions make deposits easy by allowing transfers from other accounts or remote check deposits with a mobile phone app as well as in person in a branch or by U.S. mail or phone.
Withdrawals from MMAs can be a more complicated matter. Because MMAs are savings deposit accounts, banks, credit unions and other deposit institutions are required by federal law to limit customers’ withdrawals. The federal regulation that applies is known as Reg. D, and it restricts you to a total of six of these kinds of transactions per month: transfer to another of your accounts at the same bank; third-party payment via transfer, check or debit card; and automated payments.
What doesn’t count toward the six-per-month limit: withdrawals by ATM, in person, mail, messenger or by telephone with a check mailed to the depositor.
If your number of withdrawals or transfers violate the account rules, your bank or credit union could charge you a fee; prevent you from making any more limited transactions; or close your account and deposit your funds in a checking account, which may not earn interest. Read the disclosures when you open the account to find out what the rules are. If you’re confused, call your institution and ask for clarification.
Minimum balance requirements for MMAs vary. Minimums of $100 to $10,000 are common, but some MMAs have no minimum balance requirement.
Many banks won’t charge any fees for an MMA as long as you maintain a minimum balance and don’t exceed the monthly limit on the specified transactions mentioned above.
To avoid paying these fees, shop around and compare accounts before you open one and plan your withdrawals carefully so you don’t violate the six-per-month rule. If you’re not sure how the rule applies to a specific transfer or withdrawal from your account, call your institution and ask before you make the transaction.
While MMAs tend to offer higher rates than standard savings or checking accounts, rates vary from one institution to another. Rates for MMAs, CDs and high-yield savings accounts tend to fluctuate within a narrow range of one another. A high-yield savings account is one that pays a higher rate with a higher minimum balance. If you don’t need the flexibility of an MMA, you might get a higher rate with a CD or high-yield savings account. It’s smart to shop around for an account that fits your needs.
The funds that you deposit into your MMA aren’t taxed; however, the interest you receive is taxable for federal income tax purposes, the IRS says.
If your MMA earns more than $10 of interest during a tax year, your bank should send you a copy of Form 1099-INT. This IRS form shows your name and address, the amount of interest income your MMA earned and other information. If you don’t receive a Form 1099-INT, you’re still required to report the interest you received and pay the tax, if you owe any.
You might also owe state income tax for MMA interest you earn, depending on the tax laws in your state.
The same rules apply to other types of deposit accounts, including standard checking and savings accounts, high-yield savings accounts and CDs.
MMAs are a very safe way to save money, says Michael Gerstman, a financial advisor at G2R Financial in Florida.
“MMAs are typically used as an ultra-safe harbor to place and hold money,” Gerstman says. “I say ‘hold’ because (MMA) interest rates are so low you can’t call it an investment. It’s here for a potential emergency or liquidity need.”
Why are MMAs so safe? Two reasons:
- MMAs are deposit accounts, not investments. Investments can involve both gains and losses. Deposit accounts can receive interest, but there’s no risk of loss of principal.
- MMAs are typically insured, either by the Federal Deposit Insurance Corp. for bank accounts or the National Credit Union Administration for credit union accounts. This insurance protects the depositor if the bank or credit union fails.
The standard FDIC and NCUA insurance is $250,000 per depositor, per institution, for each account ownership category. Examples of account ownership categories include single-person accounts, joint accounts and trust accounts.
Deposit insurance is another important way that MMAs differ from money market investment funds. Since investment funds aren’t deposits, they’re never protected by deposit insurance.
MMAs are ideal for situations where you need to set aside a relatively large sum without investment risk or you have a sizable sum available and haven’t yet decided whether to save, spend or invest, or if it’s intended for investment and you haven’t decided how to invest it.
MMAs make sense in these situations because:
- MMAs typically pay a higher interest rate than standard savings or checking accounts.
- MMAs allow transfers and withdrawals with no term or penalty.
- MMAs typically come with checks, a debit card or both, which makes withdrawals more convenient.
- MMAs are insured deposit accounts that have no risk of loss of principal.
These characteristics explain why MMAs are “typically used for emergency funds or as a safe harbor if someone is hesitant to take market risk, but not sure where else to invest. They may also need the liquidity that MMAs offer,” says Charisse Mackenzie, president of Saturn Wealth, an investment advisory firm in Arizona.
For all of their advantages, MMAs have one big disadvantage compared with investments: inflation risk. While MMAs are insured deposits, so the principal is never at risk, the rate of return may be less than the rate of inflation. That means MMA deposits lose purchasing power over time as market prices rise. Even though the inflation rate has been very low in recent years, it hasn’t been zero. A sum of, say, $10,000 today won’t buy as much in goods and services as $10,000 would have bought, say, a decade ago.
“The biggest negative of these accounts is that they typically don’t offer a high enough interest rate to keep up with inflation, so you are losing purchasing power,” Mackenzie says.
The trade-off between investment risk and inflation risk can make saving for a home, car or college difficult. Investors’ gains can be higher than the inflation rate, but they risk losing some or all of their principal.
However, inflation risk doesn’t make MMAs always a poor choice.
Xavier Epps, CEO of XNE Financial Advising, a financial advisory firm in the District of Columbia region, says he routinely advises his clients to use MMAs to better manage their money.
“Most consumers use MMAs for long-term savings, future purchases, such as a costly trip in the next year or so, and possibly emergencies,” Epps says.
Parents might wonder whether an MMA would be a good alternative to a 529 college savings plan.
There are two types of 529 plans:
- Prepaid tuition plans can be used to save for future tuition and mandatory fees – but not room and board – at specific colleges and universities using current prices. Prepaid plans aren’t guaranteed by the federal government, although some state governments guarantee that savers won’t lose their savings.
- Education savings plans are investment accounts that can be used for future tuition, mandatory fees and room and board at any U.S. college or university and some non-U.S. colleges and universities. These plans can also be used for tuition at private or public elementary or secondary schools, up to $10,000 per student, per year. Investments may not be guaranteed or insured.
Both types of 529 plans may have state residency requirements, offer some income tax benefits and come with a variety of fees and expenses.
MMAs and 529 plans are challenging to compare because they are different forms of savings. MMAs are much less complicated than 529 plans, but they don’t offer the significant income tax advantages of 529 education savings plans.
Whether an MMA makes sense for retirement savings depends largely on your time horizon, when you plan to use the money and how comfortable you feel with the trade-offs of investment risk versus inflation risk.
If you expect to retire many years in the future, keeping your retirement savings in an MMA could be problematic because you won’t be protected from the erosive effect of inflation. Over time, the purchasing power of your retirement savings may shrink, diminishing your ability to afford your living expenses after you stop working.
On the other hand, if you expect to retire within a few years or you’re already retired and have adequate savings for your lifestyle, medical costs and life expectancy, a more conservative approach, including an MMA, might be sensible for you. You should compare the MMA to CDs and high-yield savings accounts before you decide.
MMAs are easy to open with a process that’s similar to opening a standard checking or savings account.
You can open an MMA in person at a bank or credit union branch, online or by phone. You’ll need to complete an account application and typically make an initial deposit to open your account.
When you open an MMA, you’ll have to provide contact information and your taxpayer identification number, which is usually a Social Security number. This number is required so the institution can report your MMA interest income to the IRS for tax purposes.
The choice between MMAs, savings accounts and CDs isn’t always easy or obvious.
All three types of accounts usually offer a higher rate than a checking account. CDs tend to offer slightly better rates than savings accounts or MMAs, particularly if the CD has a lengthy term. However, that’s not always the case. Some high-yield savings accounts, which typically require a minimum balance, offer rates comparable to MMAs or even CDs.
Of the three accounts, only MMAs offer checks or a debit card for easy withdrawals. However, a savings account linked to a checking account could make your funds almost as easy to access as an MMA. If you don’t need the convenience of checks or a debit card, an MMA might not be the best choice when you could earn a higher rate with another type of account.
Both MMAs and savings accounts are almost as liquid as cash, but CDs are less liquid.
“When compared to a CD, MMAs are significantly more liquid, and you can access monies without penalty, whereas a CD typically imposes penalties on monies taken out prior to the maturity of the CD. There is also usually a minimum balance requirement,” says Gerstman.
CDs can be tapped, although you’ll usually be subject to a penalty fee or loss of interest. To reduce the risk, you can buy CDs with varying maturity dates in a structure known as a CD ladder. A ladder makes smaller sums available to you at regular intervals. For example, you could deposit $10,000 into one five-year CD, or you could deposit $2,500 into four CDs with maturities of, say, one year, two years, five years and 10 years.
Some CDs have special features that add flexibility:
- A no-penalty CD lets you make one or two penalty-free withdrawals during the term.
- A bump-up CD lets you lock in a higher rate once or twice during the term.
- A step-up CD comes with a preset rate bump during the term.
- A callable CD may offer a higher rate if you agree to close the CD if your bank decides to “call,” or cancel, it.
- Structured, indexed and market-linked CDs align the CD’s return with a market index instead of a bank interest rate.
All of these nonstandard types of CDs may have a lower initial rate, higher penalties or fees, or other restrictions to offset their unique benefits. The structured, indexed and market-linked CDs may involve a potential loss of principal.
Another benefit that MMAs, CDs and savings accounts offer is the opportunity to separate your savings from your daily living expenses. Separating savings is a good way to keep those sums out of mind so you won’t be tempted into unplanned spending as you might if the funds were in your checking account.
Given the strong similarities among MMAs, CDs and high-yield savings accounts, the choice may be more a matter of personal preference than one right answer for any given situation.
|Feature||MMA||Savings account||Checking account||CD|
|Withdrawals||Some transfers and withdrawals are limited to six per month.||Some transfers and withdrawals are limited to six per month.||Unlimited, including checks and debit card||Only with penalty; no checks, ATM or debit card|
|Minimum balance||Varies||Low or none||Low or none||Term|
|Rate||May be higher than that of most checking or savings accounts||May be higher than the rate of some MMAs or CDs; may be tiered with higher rates for larger balances||Low or no interest||Term; may be higher than that of most checking and savings accounts and MMAs|
|FDIC or NCUA insured||Yes||Yes||Yes||Yes|
A high-yield MMA refers to an account with an annual percentage yield in the higher range. Many MMAs may offer rates less than 1%, but high-yield accounts can be nearly 2%.
However, in order to receive those higher APYs, you may need to maintain a significant balance in the account. BMO Harris Bank, for instance, offers a rate of 1.85% on its MMA, but you need to deposit $5,000 to qualify. At Capital One, you also need to keep at least a $10,000 balance to earn a 1.3% APY on its 360 Money Market account. For the UFB Direct Premium Money Market, the 1.8% rate requires a $25,000 balance.
A traditional bank is one that has physical branches, which may be located in your local community, regional area, nationally or even globally. An online bank doesn’t have walk-in locations but allows transactions only online or sometimes by phone or with a mobile phone app.
Online banks historically have paid slightly higher rates for deposit accounts because they don’t have the operating costs of brick-and-mortar buildings with their parking lots, employees and utility bills. Those higher rates make online banks attractive to rate-shopping depositors.
The trade-off is convenience. If you choose an online-only bank, you won’t be able to visit a branch and speak to a teller, account representative or manager in person if you need help or have a question about your account. Instead, you’ll have to make a phone call, use an online chat service or send an email and wait for a reply.
Which option is best is mostly a matter of personal preference. That’s especially true now that most traditional banks offer robust online banking and mobile app technology as well as their branch locations.
Epps says he urges his clients to keep most of their emergency funds in a local account so they can access the funds quickly if they need to.
529 plan. A tax-advantaged savings or investment account earmarked for school tuition, mandatory fees and other education expenses.
APY. The annual percentage yield, which is an expected rate of return for 365 days, including the benefit of compounded interest.
Certificate of deposit. A deposit account with a term or maturity. A CD is also called a time deposit or time deposit account.
Checking account. A deposit account that allows unlimited withdrawals by writing a check or using a debit card.
Emergency savings. Sums set aside to be used not for daily living expenses, but only in an extraordinary situation, such as a temporary disability, job loss or natural disaster.
Individual retirement account, or IRA. A tax-advantaged savings or investment account for retirement planning.
Minimum balance. A sum that a depositor is required to maintain in an account on a daily or average monthly basis.
Money market account. A deposit account that pays interest and limits some types of transfers and withdrawals to six per month.
Money market fund. A type of mutual fund that invests mainly in cash equivalents.