What is a money market account?

Key takeaways

• Money market accounts combine features of savings and checking accounts, offering competitive interest rates with greater flexibility than traditional savings accounts.

• These accounts are federally insured up to $250,000 per depositor and provide access through checks, debit cards and electronic transfers.

• Money market accounts work well for short to medium-term savings goals like emergency funds or saving for near-term expenses.

• Interest rates, fees and minimum balance requirements vary by institution, so comparing options helps you find the best account for your needs.

A money market account is a savings tool that combines competitive interest rates with greater flexibility than traditional savings accounts. Money market accounts generally offer additional access to your funds through checks, debit cards and electronic withdrawals, making it easier to manage your money when needed.

These accounts are federally insured by the Federal Deposit Insurance Corporation (FDIC) at banks or the National Credit Union Administration (NCUA) at credit unions, offering both security and growth potential. However, they may have withdrawal limits and higher minimum balance requirements compared to regular savings accounts.

How do money market accounts work?

Money market accounts generate interest on your balance, typically calculated daily and paid monthly. Banks and credit unions often quote your rate as an annual percentage yield (APY), which helps you gauge potential earnings and compare different accounts more easily.

Interest rate mechanics: Money market accounts feature variable rates, meaning your earnings can rise or fall when market rates change. For example, if the Federal Reserve adjusts its target interest rate, your APY may follow suit. This variability means your returns aren’t guaranteed like they would be with certificates of deposit.

Access and transactions: You can typically access your money via checks, debit cards or electronic transfers, though withdrawals may be limited under federal guidelines or bank policies. Some accounts require higher minimum balances to avoid fees or earn the best rates.

Safety and insurance: Unlike money market funds which are investment products, money market accounts are deposit accounts protected by federal insurance up to $250,000 per depositor at each institution.

Bankrate insight: Best of both worlds

Money market accounts offer a sweet spot between savings accounts and checking accounts. You get better interest rates than most checking accounts while maintaining easier access to your money than you’d have with CDs or other time-locked savings products.

Pros and cons of money market accounts

Pros

• Competitive interest rates: Currently, the best money market accounts pay around 4 to 5 percent APY, helping your money grow faster than traditional savings accounts and potentially outpacing inflation.

• Federal insurance protection: Your deposits are insured up to $250,000 per account owner, provided the account is at an FDIC-member bank or NCUA-member credit union.

• Flexible access: Unlike CDs, you can access your funds when needed through checks, debit cards and electronic transfers without early withdrawal penalties.

Cons

• Higher minimum balance requirements: Money market accounts often require larger deposits than traditional savings accounts, either to open the account or earn the top APY.

• Potential withdrawal restrictions: While federal limits have been relaxed, many banks still impose transaction limits that could result in fees if exceeded.

• Variable rates: Your interest rate can change over time, potentially decreasing your earnings if market rates fall.

Need more details: Check out our guide to money market account pros and cons for a deeper analysis.

How to choose the best money market account

Finding the right money market account involves evaluating several key factors beyond just interest rates.

• APY comparison: Look for accounts offering the highest money market account APYs to maximize your earnings. Online banks often provide higher APYs than traditional brick-and-mortar institutions.

• Minimum balance requirements: Check whether the account’s balance requirements align with your financial situation. Some accounts require $1,000 or more to avoid fees or earn the advertised yield.

• Fee structure: Review potential fees including monthly maintenance charges, excess withdrawal fees, transfer fees or early closure penalties. Look for accounts that waive fees with reasonable balance requirements.

• Access features: Consider how you’ll need to access your funds. Some accounts offer checks and debit cards, while others may limit withdrawal options. Verify how many withdrawals are allowed per statement cycle.

• Digital banking features: Evaluate the bank’s online banking platform and mobile app capabilities, including features like mobile check deposit, real-time balance updates and account alerts.

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Achieve your savings goals with a money market account that offers a high yield and check-writing privileges.

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What is the difference between a money market account vs. other accounts?

Money market vs. checking accounts: Money market accounts typically offer much higher interest rates than checking accounts but aren’t designed for unlimited daily transactions. They’re ideal for occasional access while earning interest.

Money market vs. savings accounts: Both pay interest and are designed for saving, but money market accounts often provide checks and debit cards for easier access. However, they typically require higher minimum balances.

Money market vs. CDs: Certificates of deposit may pay higher rates but lock up your money for specific terms. Money market accounts offer more liquidity for shorter-term needs and goals.

• Best CD ratesLock in a high rate today.

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Money market accounts vs. money market mutual funds

While money market accounts and money market funds have similar names, they are very different. Most notably, money market funds are considered an investment because they are a type of mutual fund. They are not covered by FDIC insurance, and you could lose your principal. Here is a breakdown of their primary differences.

Key distinction: Money market accounts are safe, insured deposit accounts perfect for emergency funds and short-term savings. Money market funds are investments that could lose value and aren’t suitable for money you can’t afford to lose.

FAQs about money market accounts

• Who should choose a money market account?

  A money market account is ideal for people who want to grow their savings while maintaining access to their money. They work well for emergency fund storage, saving for near-term expenses like down payments or vacations, and situations where you need the flexibility of occasional withdrawals with better rates than checking accounts.

• Do you pay taxes on a money market account?

  Yes, interest earned on money market accounts is considered taxable income. The IRS requires you to report all taxable interest on your federal income tax return. If you earn more than $10 in interest, you’ll typically receive a Form 1099-INT from your bank to help with tax reporting.

• Is there a penalty for withdrawing money from a money market account?

  It depends on your bank’s policies. While the Federal Reserve no longer mandates the six-withdrawal limit, many institutions still enforce this restriction. Exceeding allowed withdrawals may result in fees or account reclassification. Always check your specific account terms.

• What is the highest-paying money market account right now?

  Money market rates change frequently, but top accounts currently offer APYs hovering around 4 percent APY. Online banks typically offer the most competitive rates. Check our regularly updated best money market account rates for current offerings.

• How does a money market account differ from a high-yield savings account?

  Both offer competitive interest rates, but money market accounts typically provide checks and debit card access for easier fund access. High-yield savings accounts may offer slightly better rates but usually don’t include transaction features. The best choice depends on whether you value access convenience or maximum yield.

• Can I lose money in a money market account?

  No, you cannot lose your principal in an FDIC or NCUA-insured money market account, up to the $250,000 insurance limit. However, if your account has fees that exceed your interest earnings, your balance could decrease. Also, inflation could erode your purchasing power over time if your interest rate doesn’t keep pace.

Bottom line

Money market accounts offer an excellent balance of safety, growth potential and accessibility for shorter-term savings goals. They’re particularly valuable for emergency funds, where you need the security of federal insurance and the flexibility to access funds when unexpected expenses arise.