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What is a money market account, and how does it work?

If you want the benefits of both a checking account and savings account — plus a high interest rate — consider a money market account.

Yahoo Personal Finance· Getty Images
Updated 10 min read

Money market accounts (MMAs) are deposit accounts that share features of savings and checking accounts. Like a savings account, your balance earns interest. However, you may also have the ability to write checks and/or use a debit card for account transactions like you would with a checking account.

Besides having components of savings and checking accounts, money market accounts also have distinct features that set them apart. Here’s what to know if you’re interested in opening one.

See our picks for the 10 best money market accounts available today>>

A money market account (MMA) is a type of deposit account. It works similarly to both savings and checking accounts. And like other deposit accounts, money market accounts are usually insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) up to $250,000 per depositor, per institution. This insurance protects your account balance if your bank or credit union fails.

A money market account is a type of deposit account that works very much like a savings account. However, there are some key differences.

Typically, money market accounts pay higher yields than most traditional savings accounts. However, you may need to maintain a higher minimum balance to earn the highest advertised rate and/or avoid monthly fees. There may also be limitations on how many withdrawals you can make per month.

In most cases, money market accounts also come with a debit card and check-writing privileges, which also differentiates them from savings accounts.

Learn more about how money market accounts differ from savings accounts.

A common misconception is that money market accounts are the same as money market funds. While their names sound similar, the two work differently. Unlike money market accounts, which carry deposit insurance, money market funds are not deposit accounts or insured by the FDIC or NCUA.

Instead, money market funds are a type of mutual fund you can invest in through a brokerage. These funds can gain or lose value based on stock market performance. Your money market account balance, on the other hand, isn’t tied to market performance, so it won't lose money due to market fluctuations.

Learn more about the differences between money market accounts vs. money market funds.

Money market accounts often come with tiered interest rates. This means the highest rates may be reserved for account holders with larger balances, while smaller balances may earn less interest. For instance, a bank might offer 0.10% APY on balances up to $5,000, 0.50% APY on balances of $5,001 to $10,000, and so on. Rates on money market accounts are also variable, meaning they can adjust up or down over time at the bank’s discretion.

Currently, the national average rate for a money market account is 0.66%. However, this is just an average; many banks and credit unions offer rates as high as 3% APY or even more.

Here’s a look at how the national average interest rate for money market accounts has changed over the last year:

Money market accounts often come with relatively high minimum balance requirements compared to traditional savings or checking accounts. For instance, you may need to maintain a balance of $2,000 or more to avoid monthly fees.

Learn more about money market minimum balance requirements.

Money market accounts may be subject to certain fees and limitations. These include minimum balance fees, monthly maintenance fees, and others. Fees vary widely by financial institution, so be sure to compare fees when selecting an account and choose one that comes with low or no fees.

It’s also important to pay attention to withdrawal limits. While the Federal Reserve essentially eliminated withdrawal limits in 2020, some banks still impose them. It’s common for banks to charge fees for exceeding six withdrawals within a month.

There are a few benefits and drawbacks to putting your savings in a money market account.

  • Higher interest rates compared to savings accounts: In most cases, money market accounts offer higher interest rates than traditional savings accounts. However, some high-yield savings accounts offer rates comparable to or higher than money market account rates, so it’s a good idea to consider both options.

  • Lower risk compared to other investment options: If you're saving for short-term goals or emergency needs, you don’t want your balance to lose value if the market dips. A money market account can be a great alternative to investing since money market accounts don’t lose money.

  • Easy access to funds: While there may be limits on how often you can withdraw your funds, you'll still have fairly easy access to your money via checks and a debit card.

  • Limited withdrawals: If you plan to use your money market account for everyday banking, this may not be the best fit. While the federal government no longer limits monthly withdrawals on money market and savings accounts at six per month, some banks and credit unions still have these limits in place and may charge you a fee for excessive withdrawals.

  • Lower potential returns compared to riskier investments: If you're looking for a place to put your money for long-term financial needs such as retirement, you'll have a better chance of reaching your savings goals with high-risk market investments.

  • Fees can diminish returns: If your money market account charges a monthly fee, it'll eat into your interest earnings.

A money market account isn’t the only option out there. There are several types of savings products you can consider that may work better depending on your specific financial needs.

Traditional savings accounts are widely available at banks and credit unions. They offer nominal interest rates, but flexible access to your money. Traditional savings accounts generally don’t offer the same features as money market accounts, such as checks and debit cards.

With a high-yield savings account, your interest rate may be higher than what most money market accounts offer, and without needing to maintian a minimum balance. They also offer easy access to your funds.

Certificates of deposit require you to keep your money in the account for a certain period of time, known as the term. CD terms can range from a few months to several years. In return, you’ll earn a fixed interest rate, which varies by bank. CD rates may be higher than money market account rates, depending on your financial institution. However, if you withdraw your money early, you’ll be subject to an early withdrawal penalty, which can cancel out part or all of those earnings.

High-yield checking accounts pay a higher yield than most traditional or interest-bearing checking accounts. In exchange for a higher yield, you may be subject to a monthly maintenance fee, a higher minimum opening deposit, or minimum balance requirements, although this is not always the case.

Savings bonds are a type of debt security that essentially allows the public to lend money to the federal government in exchange for guaranteed interest for up to 30 years. Individuals can buy savings bonds in amounts ranging from $25 to $10,000 (or $50 to $5,000, if buying paper I bonds).

Savings bonds are considered low-risk investments because they’re backed by the full faith and credit of the United States government. Interest is paid out when the bond reaches maturity or when it’s cashed in.

Read more: I bond vs. high-yield savings account: Which is better for beating inflation?

As with any type of account, it’s essential to compare your options if you’re interested in a new money market account. Researching the following factors can help you find an account that best meets your needs:

  • APY: The higher your APY, the more you stand to earn in a money market account. Before opening an account, take some time to compare rates available at different financial institutions to find the best option.

  • Minimum balance: Pay attention to any minimum opening deposit or minimum balance requirements to determine whether an account is right for you. A higher minimum balance may come with a higher interest rate.

  • Account features: While many money market accounts offer check-writing privileges and debit card access, comparing different account features is still important. For instance, does the bank limit how much you can withdraw or how often you can take money out in a month? Are you able to monitor your account balance via mobile app?

  • Fees: Some banks may charge you fees if your money market account balance drops below a specific amount. Other fees may apply as well. Keep in mind that if a money market account offers a high APY and high fees, it may not be the best choice. Calculate how fees may impact your balance in addition to interest before opening a new account.

Opening a money market account is fairly simple and can often be done in a few minutes online. The process typically looks something like this:

1. Choose a financial institution

You’ll want to consider various factors such as branches or ATMs near you, customer service hours, mobile banking capabilities, and more. After thoroughly researching your options, choose your bank or credit union and get ready to open a money market account.

2. Gather necessary documents

You’ll need to provide certain documents and information to open a new account, including your Social Security number (SSN) or Individual Tax Identification Number (ITIN), a valid government-issued ID such as a driver’s license or passport, and proof of address.

3. Review account terms and conditions

Before opening an account, be sure you fully understand the account’s terms and conditions, including potential fees, minimum balance requirements, and more.

4. Submit your application

Once you’ve taken these steps, it’s time to open your account. Many institutions let you sign up for a new account online, which can be convenient. Others let you sign up in person or over the phone. Choose the option that’s most comfortable for you.

5. Fund your account

Once your account is approved and opened, you’ll need to transfer money into it. Some accounts may require you to fund it within a certain time frame.

Learn more about how to open a money market account.

As with other types of savings accounts, you’ll likely be able to track money market account transactions and review your balance online. Some banks may also offer a mobile app that allows you to access your account at any time. Others may have physical branches you can visit.

Overall, a money market account may be a smart option for short- or medium-term savings goals. For instance, if you want to build an emergency fund or save for a car down payment, opening a money market account could work in your favor. However, keep in mind these accounts aren't great for long-term savings goals, such as retirement, as investments may offer better returns.