Pros and cons of a money market account

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As you consider deposit options for your funds, money market accounts (MMAs) will likely come up in your search. Think of a money market account as a parking spot for cash that you could need at a moment’s notice, but with a few guardrails to prevent you from accessing that money for easy spending.

Just as you compare the pros and cons of any place where you’ll put your money, it’s important to understand the benefits and drawbacks of money market accounts. (And to clarify, we’re talking about money market accounts, not money market funds.)

Money market account features

Money market accounts are somewhere between a checking and savings account, providing annual percentage yields (APYs) on par with savings accounts with the flexibility of a checking account. As such, they may have:

• Check-writing and debit/ATM card access
• Monthly fees and minimum deposit requirements
• Online bill pay
• Transaction limits

That last bullet is especially important. A bank’s transaction limit will tell you how many times per month you can withdraw money out of the account before incurring a fee. And if you surpass the transaction limit too often, some banks may even convert your MMA into a checking account or close your account altogether.

Advantages of money market accounts

Perks of money market accounts often include competitive annual percentage yields (APYs) and easy access to your cash, and your funds are protected when the account is with a federally-insured bank or credit union.

MMAs earn interest

When you make a deposit in a money market account, it does more than just sit there. It grows. The average money market account rate is currently 0.48 percent, according to Bankrate data. Make sure to shop around, though. The best money market rates are significantly higher than the average, with many over 4 percent and up to 5.25 percent.

You have easy access to cash

You don’t have to jump through hoops to withdraw the money from a money market account when you need it. You don’t have to completely redo your banking portfolio, either. Instead, you can link your checking account at your existing financial institution to a money market account at a new bank for online transfers.

Additionally, many money market accounts come with debit cards for ATM access and check-writing privileges. There is typically a limit of six withdrawals per statement period, though.

Money is protected by federal insurance

At federally insured institutions, you don’t have to worry about the safety of the funds in a money market account. Provided the bank or credit union has insurance from the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA), respectively, up to $250,000 is protected even if the institution fails and shuts its doors.

Disadvantages of money market accounts

Better rates may be available elsewhere

While the best money market accounts offer some decent earning potential, it’s important to note that you might be able to find higher interest rates with other savings products that come with additional restrictions.

For example, you often won’t earn as much with a money market account as you would with a traditional CD because the CD has a time commitment: The bank will pay you more in exchange for locking up your funds longer. Keep the possible trade-off of a lower yield in mind when you’re thinking about opening an account.

Minimum balance requirements may stand in the way

Most money market accounts have fairly low minimum balance requirements – as little as $0, in some cases. However, capitalizing on the interest rate that initially grabbed your attention might only be possible with a significant deposit. Some banks and credit unions have a $100,000 minimum in order to score their best rates.

Banks may charge monthly fees

While CDs don’t charge monthly service fees, money market accounts sometimes do charge them. It pays to research monthly service fees when you’re shopping for a money market account. Some will waive the fee if you maintain a set minimum balance or set up a direct deposit into the account. Finding a money market account that charges no monthly fees — or makes them easy to avoid — helps ensure such fees won’t eat away at your balance every month.

Is a money market account worth it?

The safety, liquidity and yield of money market accounts makes them great candidates for a few key pieces of your personal finance portfolio.

• Your emergency fund: The importance of having money set away for those unplanned, unwanted expenses — a medical emergency, a major car repair or a job loss, for example — cannot be overstated. A money market account makes those funds easily accessible if you need them while keeping them separate from your checking account and the temptation to dip into them.
• Your next big expense: Whether you’re saving for a wedding or a vacation, a money market account gives you a good place to park those funds. Plus, you can take advantage of the interest rate to help give your savings a bump and get you closer to the finish line a bit faster.
• Your tax payments: For independent contractors and freelance workers, setting money aside for taxes can be tricky. A money market account can help you make sure you’re saving the appropriate amount of money and send quarterly tax estimates.

While online high-yield savings accounts and CDs are also options for storing money away for different goals, a money market account might be a better option when more frequent access to that money is desired. If you’re saving for a particular goal, such as buying a car, a money market account will allow you to write a check from the account when it comes time to use those funds.

Money market accounts vs. other savings products

It can pay to compare money market accounts to other savings products to determine which is best for your needs. Points to compare include the APYs and any fees, as well as any restrictions that come with each account.

Savings accounts

Money markets commonly reward larger balance tiers with higher APYs, which can make them attractive to big savers. If you’re not looking to store a large balance in the account, you may find a savings account to be a better option.

Unlike some money markets, savings accounts generally don’t provide the ability to pay bills, write checks and make debit card purchases. Those who aren’t looking for such capabilities may prefer a standard savings account instead.

Money market funds

While money market accounts and money market funds may be similar in name, they are completely different products.

Money market funds are relatively safe. However, they do not have insurance, so they’re not worry-free. Money market funds are better suited for your brokerage account, giving you the ability to hop on investment opportunities at a moment’s notice. They can be easily mixed up with money market accounts, which serves as a valuable lesson: Always do thoughtful research any time you’re thinking about depositing, investing or spending your hard-earned money.

— Greg McBride, CFA, is Bankrate’s chief financial analyst. As a personal finance expert, he is regularly quoted in the media for his in-depth commentary and practical advice to consumers. Bankrate’s Marcos Cabello, René Bennett and Karen Bennett contributed to updates of this story.