Money Market Account (MMA)
A Money Market Account (MMA) is a type of savings account that offers features similar to both savings and checking accounts, including the ability to write checks. Traditionally, MMAs provided higher interest rates than standard savings accounts, as banks invested deposits in low-risk financial instruments. However, in low-interest environments, the difference in rates may be negligible. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) when held in insured institutions.
MMAs allow for a limited number of withdrawals or transfers each month, which used to be restricted by federal regulations but were relaxed during the COVID-19 pandemic. Generally, they require a higher minimum balance than regular savings accounts and may come with maintenance fees that could offset interest earnings. While they offer more flexibility than savings accounts, they typically provide less than checking accounts. MMAs are suited for individuals looking to save money with the ability to access it occasionally, making them useful for emergencies or planned expenses.
Money Market Account (MMA)
A money market account is a type of savings account with a check-writing feature. Traditionally, it paid a higher interest rate than basic savings accounts because banks used these deposits to invest in money market funds. In a low-interest rate environment, however, there often is little or no difference in the interest rates of a money market account and a savings account.
Money market accounts are considered deposit accounts. Like all deposit accounts, they are insured by the Federal Deposit Insurance Corporation (when deposited in FDIC-insured banks) or the National Credit Union Administration (NCUA) (when deposited in NCUA-insured credit unions).
Money market accounts were once subject to federal restrictions that limit the number of transactions a month to a total of six "convenient" withdrawals or transfers a month, according to Regulation D. These withdrawals and transfers included those made by debit card, check, direct bill payments, other bank accounts, and by phone, computer, or fax, but did not include limits on transfers or withdrawals made in person at a bank, by mail, or by ATM. However, in 2020, due to the COVID-19 pandemic, the Federal Reserve removed these limits. Some banks still enforce a certain number of transactions, though.
Money market accounts are distinct from money market funds. Money market accounts are savings accounts, while money market funds are investment products that typically require a sizable investment.
Overview
Money market accounts, also called money market deposit accounts, have characteristics of both savings accounts and checking accounts. Prior to the 1990s, money market accounts were quite different from savings accounts, but today they share the same characteristics and are regulated by the Federal Reserve in the same way. Both allow unlimited withdrawals if made in person at a bank. Both allow an unlimited number of deposits. Both usually require a minimum balance, though the money market may require a higher minimum balance than a savings account. Both pay interest on deposits. Both are insured by the FDIC and NCUA up to the maximum amount of deposits per bank or credit union when deposited in insured institutions.
Although they both are essentially savings accounts, many banks treat them differently and impose additional restrictions on money market accounts. These restrictions include a minimum dollar amount to maintain an account as well as maintenance and other fees. They also sometimes add perks, such as debit cards, that they do not provide with savings accounts.
Money market accounts are similar to checking accounts in that they allow some check-writing privileges. Unlike checking accounts, which typically have unlimited check-writing abilities, money market accounts limit the number of checks that can be written in a period, usually a month. These checks count against the total withdrawals allowed for this type of account, unless the check is mailed to the bank.
Most banks charge a penalty for excess withdrawals or check writing. The Federal Reserve regulations allow a bank to deny excess transfers or withdrawals and to close an account that exceeds the allowable limit.
In the past, banks generally offered a slightly higher interest rate for a money market account than for a savings account. The reason for this higher rate was due to the difference in how banks generate income based on savings and money market deposits. Banks generally use a portion of money deposited in savings accounts to make loans to customers. They then return a small portion of the returns on these loans to savings account customers in the form of interest. Banks generate income from money deposited in money market accounts by investing it municipal bonds, treasury notes, commercial paper, certificates of deposit, and government securities. These are all low-risk investments that typically have higher returns than the income earned on bank loans. In a low-interest environment, however, there is negligible difference in the income generated by these means, and so interest rates are similar for both savings accounts and money market accounts. Banks typically pay a variable rate on money market accounts, and interest may compound either monthly or daily.
Opening a Money Market Account
Opening a money market account is very similar to opening a savings account. A prospective account holder identifies what features are most important and then researches different banks to find the one that best meets those requirements. Typically, the primary desired feature is the interest rate. Most money market accounts compound interest, so researchers should look for banks with high annual percentage yields (APYs). Questions to ask a bank include how often it compounds the interest. Those that compound more frequently will have higher APYs.
A bank with the highest APY does not automatically result in the highest earnings, however. Bank fees, such as the monthly maintenance fee, should be compared when choosing a money market account. A high monthly maintenance fee or other fees may offset any earnings from a high APY.
Another important consideration is the minimum balance requirement. In the past, many banks required money market accounts to maintain a high minimum daily balance, such as $5,000 or more. Some also required a high dollar amount to open an account, such as $10,000. Banks placed these restrictions on money market accounts because they wanted to attract customers who had large amounts of money to save in return for the higher interest rates offered to money market accounts. Customers who fell below the minimum were subject to monthly maintenance costs or fees. Today, many of these restrictions have loosened; although most banks still require a minimum daily balance and typically enforce fees for falling below this balance, the minimum amount may be less, such as $2,500.
Other features to consider include how the bank allows customers to access money (such as phone transfers and by ATM), the limitations it imposes on transactions in addition to those imposed by the Federal Reserve (such as requiring withdrawals to be in certain amounts or minimum number of checks), what penalties it charges on withdrawals, and perks (such as debit cards, free checks, and access to other investment opportunities).
Banks vary considerably in their terms and services, so it is advisable to check out multiple banks to find the one that best meets a prospective customer’s needs. Online banks often offer higher APYs than brick-and-mortar banks.
Advantages and Disadvantages
Traditionally, the primary advantage to a money market account was that it offered a slightly higher interest rate than an ordinary savings account. When interest rates for money market accounts are about the same as that for a savings account, a money market account may cause the account holder to lose money, making it less advantageous than a regular savings account. This is because money market accounts typically have maintenance fees that are paid out of the account each month. If the interest rate on the money market account is no greater, or barely greater, than that of a comparable savings account, the money market account’s yield after fees might be less than that of the savings account.
Another disadvantage of a money market account is that it typically requires a higher minimum daily balance than other savings accounts. This limits access to more of the account holder’s money.
Both money market accounts and savings accounts allow a person to save money. Both pay interest. Both have the same restrictions on the number of withdrawals. A money market account, however, gives access to money in a way not allowed by a savings account: check withdrawals. This allows people to combine savings with a degree of withdrawal flexibility.
Money market accounts fall between savings accounts and checking accounts. They offer more flexibility than a savings account but less than a checking account. Because of the check-writing feature, money can be accessed more easily than a savings account, but less frequently than a checking account. This makes money market accounts an ideal way for people to set aside money for an emergency, big purchase, long-term goal, or financial transition such as changing jobs or moving while still giving them the ability to access their money when necessary.
Money market accounts also offer more flexibility than certificates of deposit (CD), and both may have similar interest rates. Money in a CD is locked in and inaccessible for a designated period of time. In contrast, money deposited in a money market account can be accessed at any time and can be withdrawn in its entirety at any time.
Bibliography
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“What Is a Money Market Account?” Consumer Financial Protection Bureau, 28 Aug. 2023, www.consumerfinance.gov/ask-cfpb/what-is-a-money-market-account-en-1007/. Accessed 26 Dec. 2024.