A money market account, or money market deposit account, is a government-insured bank account that pays relatively high interest rates and provides cash withdrawal privileges. This type of account offers both savings and checking tools at higher yields than regular savings and checking accounts. Money market accounts are offered by banks and credit unions and have several significant advantages and disadvantages.
How it Works
Before choosing this option, it's important to understand how a money market account works. Unlike money market mutual funds, a money market deposit account works just like a checking or savings account. You'll sign up for this type of account at your bank and likely won't notice any difference from a regular bank account you'd set up.
When you deposit your funds into a money market, however, you will notice a few benefits that you don't find with a traditional checking or savings account. Banks steer members toward money market accounts, especially if they maintain a high balance. Although it doesn't pay out as a CD might, you'll have access to your funds when you need them, rather than being restricted to leaving the money alone for months at a time.
The Advantages of Money Market Accounts
Money market accounts pay higher interest rates than other types of bank accounts, including passbook savings accounts and regular savings accounts, provided they maintain the minimum balance. The interest rate is tiered, compounded and credited monthly so that a money market account accrues more profit as the account balance increases.
The independent Federal Deposit Insurance Corp. insures money market accounts up to the $250,000 limit per account, making them low-risk and safe investments. This makes the account popular with investors as it protects them against loss of deposit. Since the FDIC's creation, not a single person has lost money in one of its insured financial institutions. If your money market account is with a credit union, your deposits will be protected by the National Credit Union Administration.
Account holders can easily access their money market accounts through ATMs, transfers and checks. If you bank online, you'll see your money market account displayed just as you would any other checking and savings account. As long as you haven't exceeded your account limits, you'll be able to move money between accounts as you would with standard checking and savings.
The Disadvantages of Money Market Accounts
Financial institutions require account holders to maintain a minimum balance in their money market accounts. Bank of America, for example, requires a minimum balance of $2,500 for its Rewards Money Market Savings account. Accounts that do not maintain this minimum come with a $12 per month maintenance fee. You can also eliminate that fee by connecting this account to a qualifying checking account. Commerce Bank’s Premium Money Market Account specifies an average daily balance of $5,000.
Most money market accounts allow only a limited number of monthly withdrawals and transfers as per federal banking regulations. For example, the National Bank permits no more than six withdrawals per statement cycle. Commerce Bank’s Premium Money Market Account allows up to six transfers or withdrawals per month. This poses an inconvenience to a customer who needs to make an emergency withdrawal that will exceed the number of withdrawals permitted.
A variable and fluctuating interest rate applies on a money market account. The interest rate depends on changes in the overall market interest rates. Banks and other depository institutions offering money market accounts establish fees for account maintenance, transactions and other financial services – which reduce the value of the account.
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