If you're looking for the best yields without locking your money into a CD, you'll have to make sure to look at money market accounts, savings accounts and even checking accounts. Perhaps in today's awful rate environment, rates may not be the main factor in your decision. If that's the case, you may choose these accounts based primarily on the account features. However, if you want the highest rate, any one of these 3 types of accounts could be on top.
Money Market Accounts vs. Savings Accounts
Money market accounts are very similar to savings accounts. First, don't confuse money market accounts with money market funds. Anything with "fund" in the name is not a bank account. Both savings and money market accounts are subject to Regulation D which limits most types of withdrawals to a maximum of 6 per month. Money market accounts typically offer limited check writing. Savings accounts do not. Money market accounts often have minimum balance requirements and monthly fees for low balances. These are less common for savings accounts.
Money Market Accounts With Minimum Balance Requirements
To offset monthly fees for low balances, money market accounts often have higher yields than savings accounts. That's currently the case for UFB Direct, Incredible Bank and MyBankingDirect. All 3 of these banks offer money market accounts with top rates. The downside is that all have monthly fees if the balance falls below a minimum balance.
Money Market Accounts With No Rate Advantages
Money market accounts don't always have higher rates than savings accounts. TIAA Direct's savings account is one example. Currently, its savings account has the same rate as its money market account. That rate (1.25% APY as of 6/19/2012) is currently the best rate from a liquid account without a balance cap and without activity requirements. Another example is Ally Bank. For the last few years it has kept its savings account rate equal to its money market rate.
Money Market Accounts With No Balance Requirements
Money market accounts don't always have minimum balance requirements and rate tiers. In addition to matching the savings account rates, the money market accounts at TIAA Direct and Ally Bank don't have minimum balance requirements to avoid fees and they don't have rate tiers. All balances receive the same top rate. So for these two banks, there's no reason to choose the savings account instead of the money market account. The money market account has all the advantages of the savings account plus it offers limited check writing. Of course that could change in the future. At least for Ally Bank, these features have held for several years.
Money Market Accounts With Lower Rates
Money market accounts sometimes have lower rates and minimum balance requirements. In these cases, the customers pay the price for limited check writing. That's the case with Discover Bank. Not only does its money market account have lower rates than Discover's Online Savings Account, it also has a monthly fee for low balances and a rate tier that requires a $100K balance to qualify for the top rate.
Checking Accounts With the Best Rates
Savings and money market accounts don't always have the highest rates for liquid accounts. Checking accounts sometimes have the highest rates. For non-reward checking accounts, this isn't common. For most internet banks, the internet checking rates are lower than the money market or savings account rates. The one exception to this is ING DIRECT. Its Electric Orange checking account has always had a higher top rate than its Orange Savings Account. The downside is that this top rate requires a large balance. The best rate requires a $100K balance and the mid-tier rate requires a $50K balance. A much lower rate applies to smaller balances. My guess is that ING DIRECT decided to give the Electric Orange account money market rates rather than offering a separate money market account. For small balances, the Electric Orange looks like a checking account from an interest rate point of view. For large balances, it looks like a money market account. Since it's a checking account, customers don't have to worry about withdrawal limitations.
Reward Checking Still Offers the Highest Rates
Finally, if you are willing to do some work to maximize your interest rates, the reward checking offers the highest rates. You can currently get reward checking rates twice as high as the highest savings account rate. Most reward checking accounts are offered by community banks and credit unions. They require monthly debit card usage and a few other monthly activities to qualify for the top rate. Another downside is that most reward checking accounts only pay the top rate for a certain maximum balance ($25,000 is common).
There is one internet bank that offers a reward checking account. Bank of Internet USA has been offering its Rewards Checking account with a top rate of 1.25% APY for almost a year (as of 6/19/2012). Unlike most reward checking accounts, this one has no balance cap.
For more information on reward checking accounts, please refer to my post 10 Common Traits of High-Yield Reward Checking Accounts.
The highest yields can come from savings, money market and checking accounts. So if you're hunting for the best rates, make sure you don't limit your search to any one of these. You can find the best rates using our rate tables: