Money Market Account

How Money Market Accounts Work

A money market account is a high balance hybrid of a checking and savings account. In return for carrying a high balance on the account, usually $100,000 or more, the bank rewards the customer with a higher interest rate on their savings balance. Interest rates are tiered on money market accounts, meaning higher balances carry higher rates of interest. These accounts are similar to checking accounts because the funds are very liquid and can be withdrawn without penalty but, like a savings account, the frequency of withdrawals allowed per month is limited to typically between four and six.

Money market accounts are considered a safe investment because the funds are insured through the FDIC. There are fees associated with a money market account. Like an ordinary savings account, banks will charge a fee for exceeding the maximum number of withdrawals per month. Fees may also be assessed if the balance on the account falls below the minimum required for the account type.

One major benefit of a money market account is that there is no contracted commitment for long term investment. In the event of an unexpected expense or emergency, the account can be closed without a penalty for early withdrawal. This is not true for a Certificate of Deposit or a traditional retirement account. The pitfall here is that the money market account tends to have a lower rate of return than the CD or retirement account because banks are unable to invest the funds in higher yield, long term investments and generally loan the funds at traditional loan rates or invests them in low risk Government bonds and securities. Consumers do not receive tax incentives on funds invested in money market accounts. With traditional retirement plans, funds are not taxed until they are withdrawn from the account.

Interest on money market accounts is compounded daily and will be paid once per month. Account holders can see this activity on their monthly statement. Interest rates can vary from bank to bank but average between two and six percent. A six percent return on a high balance account can be quite substantial so maintaining the minimum balance can be very lucrative.

Money market accounts are available at most banks and credit unions. Rates, minimum balance and withdrawal requirements can vary from institution to institution. Credit Unions may also provide additional insurance on funds deposited by their customers through the National Credit Union Shared Insurance Fund. Financial institutions remain fairly competitive, however, because high balance accounts are very attractive for their lending potential.