Dedicated to Deposits: Deals, Data, and Discussion

Personal Banking 101: Money Market Accounts


One way that some savers attempt to increase their returns is to put their money in a money market bank account. Money market accounts have a certain attractiveness due to their sometimes competitive rates as well as the fact that they are covered by FDIC insurance. In the most basic of terms, a money market bank account can offer the chance of better interest earnings than a traditional savings account, combined with the ability to access the money (on a limited basis) in a manner similar to a checking account. However, it is important to understand that money market bank accounts are not checking accounts.

How the Federal Reserve Classifies Money Market Bank Accounts

Even though it is possible to write checks from a money market bank account, realize that the Federal Reserve classifies them as savings deposit accounts; this means money market bank accounts are subject to Regulation D. It is true, though, that financial institutions set up money market deposit accounts in a way that is akin to NOW (negotiable order of withdrawal) accounts. These efforts produce a hybrid that can be attractive to savers in some instances, since there is a certain amount of flexibility combined with the possibility of earning a higher interest rate.

Since money market bank accounts are classified as savings deposit accounts, though, you are limited as to withdrawals that you can make. Regulation D rules state that you can only make six withdrawals each month from a money market bank account. (Note, though, that this is a maximum amount. Banks can choose to limit you to three or four – or any number of – withdrawals.) If you make more than six withdrawals a month, Regulation D requires that the financial institution move your money to an account that doesn’t bear interest, or that your account be closed. Some banks and credit unions will impose the lower withdrawal limits and charge hefty fees when you violate them.

Withdrawals from a Money Market Deposit Account

Most money market bank accounts allow you to write a limited number of checks, creating easy access to your money. Some accounts will even come with a debit card, although you will need to be careful when using it; debit card transactions count toward your Regulation D limit. If you write four checks from your account, and make two debit card purchases, you will be at your limit. If your financial institution imposes lower limits, you will reach it faster and could be charged a fee. Other transactions that count toward your six include:

  • Automatic transfers out of your money market account.
  • Point of Sale transactions.
  • Bill pay transactions.
  • Automated payments.

There are certain types of transactions that do not count toward your Federal Reserve imposed limit of six withdrawals a month. You can make as many deposits as you like to a money market bank account. Additionally, you can make in-person transfers out of your account. So, if you go to the bank to transfer money from your money market bank account to another bank account, it does not count toward your six.

Also, be aware that minimum balance requirements are part of virtually any money market account. If you drop below the minimum balance, you could be charged a fee. Make sure you understand the withdrawal limits and balance requirements associated with your specific money market bank account before you open it.

Money Market Mutual Funds

Another money market product that can be attractive to savers is the money market mutual fund. However, it is vital to understand that a money market mutual fund is not a deposit account. Money market mutual funds do not come with FDIC insurance coverage, so if you lose money, it is gone – just as you can lose money in any other mutual fund investment.

Some are attracted to money market mutual funds because the higher potential returns, in return for the slightly increased risk. One of the reasons that many consider money market mutual funds as safe as a deposit account is that the SEC is involved with monitoring them. Indeed, in 2010, the SEC approved reforms meant to protect investors. Additionally, some investors are drawn to the idea that there are some money market mutual funds that are tax exempt. (Although this was more attractive back when returns on these investments were higher.) You can also hold a money market fund in an IRA.

For the most part, money market mutual funds invest in securities that are traditionally quite reliable, with an average maturity that is less than 120 days. Many money market mutual funds invest in short-term government bonds (at all levels from federal to municipal) that are considered reasonably safe. Other possibilities include short-term commercial paper and corporate bonds. Returns are lower than what you might get in the stock market in some cases. In fact, sometimes returns on money market mutual funds are even lower than what you get in a high yield savings account. Automatic sweep or “core” options may mean that you have to choose a money market fund when you have a brokerage account. Indeed, many money market funds considered lately are the result of a desire for a safe place for their funds in a brokerage account. It can tempting to have a relatively safe investment where the money is accessible – albeit in a limited fashion – by check or debit card.

Even though money market funds are considered quite safe by most investors and savers, it is important to realize that there have been instances in which money market mutual funds have lost money. So there is the risk of loss that you need to be aware of.

Like a money market bank account, many money market mutual funds come with checking writing privileges and/or debit card access. However, you are likely to be limited as to your withdrawal transactions, so it is important not to get too carried away; the fees that result could be significant. Also, pay attention to other costs related to your money market mutual fund. Minimum requirements might be in place. Like any other mutual fund, there are fees to be paid. While expense ratios are generally in the neighborhood of 0.5% to 0.75% on money market mutual funds, it is still something to think about. Check into all of the fees associated with the money market mutual fund before investing.

Bottom Line

Money market accounts, whether you go with a bank deposit account or a mutual fund, can be a way to squeeze a little more yield from your cash while keeping it fairly safe for capital preservation purposes. You may even be able to beat inflation in certain instances. However, before you commit your funds, make sure you understand the limitations, requirements and fees that may be imposed.

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Comments
6 comments.
Comment #1 by Anonymous posted on
Anonymous
Way too verbose, especially for those that don't already know this and are likely to have an MTV attention span. One sentence summary: MM accounts pay better interest than a checking account but gov't regulations require the # of permitted withdrawls per month to be limited (typically 6), excluding ATM and in-person transactions.

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Comment #2 by John (anonymous) posted on
John
Hang Mr. or Mrs. Anonymous, you have to understand Miranda is just being thurough. For those of us that don't have the "MTV attention span", we or at least I can appreciate the effort Miranda put into writing this article. Not everyone that reads this blog is familiar with Regulation D or its implications.

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Comment #3 by Anonymous posted on
Anonymous
Bank money market accounts were created in the early 1980s because banks could not compete with money market mutual funds that were paying out rates beyond 10% while the passbook savings rate was stuck at 5.25% because of federal regulations.  Money market mutual funds are not insured and are essentially an investment pool of purchased securities that group members invest in.  The money market mutual fund rates have consistently beaten bank money market account rates until 2008 when the bottom fell out from the subprime default catastrophe.  Now bank rates are above money market fund rates because of the depressed yields on the securities that these funds MUST invest in.  Banks have other ways of making money so they don't have to lower their yields that drastically as the funds have had to do now.  The money market account is really a savings account with a few extra options that make it more flexible than a pure savings account.  The minimum balance requirements are usually higher than for the standard savings account.  Because of that, the rate is higher.  If you see the word "fund" on any financial product description, you could lose money.

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Comment #4 by Anonymous posted on
Anonymous
The Investment Company Institute reports that as of Jan. 5, 2010, money market fund investments for retail and institutional investors totaled $2,797 billion. That's down nearly half a billion dollars from last year at this time.
  It looks like some investors are still leaving their money in MMF even with yields near 0%.  I guess they must be using them as temporary holders for their money between stock trades?  Or maybe some are just too lazy to move the money elsewhere?

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Comment #6 by your mom (anonymous) posted on
your mom
this is too long

2