Banking 101: Money Market vs. Checking Account: How do They Differ?

Checking accounts and money market accounts (MMAs) both offer a decent return on your money without tying up funds in less-liquid, long-term investments. Both offer interest rates that are higher than rates on many regular savings accounts, and they feature lower risk and higher liquidity than some other investment options.  Understanding the key differences between these two deposit accounts can help you choose which type is right for you.

Money market vs. checking account: Which is better?

Money market vs. checking accounts: Interest rates

Money market accounts generally offer higher interest rates than regular savings accounts and most regular checking accounts. As of February 2020, standard checking accounts had an average APY of 0.191%, and savings accounts had an average APY of 0.271%. Money market accounts offered an average APY of 0.370%.

Online banks and credit unions offer the best high-yield checking accounts. Many are reward checking accounts, which can pay much higher interest rates than regular checking accounts.

As of February 2020, high-yield reward checking accounts paid an average APY of 1.874%, but they generally have these two conditions:

1. The high interest rate is typically capped at a maximum balance, from $10,000 to $25,000. 
2. Customers qualify for the high interest rate by meeting certain requirements, such as making a set number of debit card purchases every month or depositing a minimum amount in the account every month. 

Money market vs. checking accounts: Accessibility

How many monthly transactions do you need to make with your account? This is the key question to answer when deciding between a high-yield checking account and a money market account.

Federal Reserve Regulation D (Reg D) limits you to six “convenient” withdrawals from a money market account each month. Convenient withdrawals include those made by debit card, check or electronic transfer. Withdrawals made in person at a branch or ATM, by mail, by messenger or by telephone check are not limited by Regulation D. These limits also apply to savings accounts. 

Checking accounts offer more flexibility, as there are no maximum transaction limits. As noted above, you may need to make a set number of transactions and deposits in a high-yield checking account in order to receive the highest interest rates available. 

Money market vs. checking: Deposit insurance

Both money market accounts and high-yield checking accounts carry very low risks. Unlike money market mutual funds or money market funds, which are offered by investment companies, money market accounts and high-yield checking accounts are covered by deposit insurance. 

Accounts with accredited banks are insured by the Federal Deposit Insurance Corporation (FDIC). Meanwhile, accounts at accredited credit unions are insured by the National Credit Union Administration (NCUA).

Minimum balance requirements and fees

Many money market accounts require that you maintain a minimum balance to qualify for the best available interest rate. If your balance dips below the minimum, your interest rate is usually reduced significantly. Balance requirements vary by institution, and there are account options that offer low or no minimum balance requirements. Make sure you know exactly what the terms are before you open a money market account. 

High-yield checking accounts sometimes charge monthly maintenance fees. Often such fees can be waived if you meet the same sorts of requirements needed to secure the highest interest rates on offer, like making a certain number of debit card transactions or depositing a minimum amount every month. 

Money market account pros and cons

Money market accounts offer the ease of access you get with a checking account — debit cards and checks — with the competitive interest rates of a savings account.

Money market account pros

• High interest rates: The more interest your money earns, the better. Money market accounts often have balance tiers, which pay higher interest rates on larger balances. 
• Federally insured: Whether you open an account with a bank or a credit union, deposits with accredited institutions are insured by the FDIC or NCUA. Money market accounts shouldn’t be confused with money market funds or money market mutual funds, which are market investments that aren’t insured by the FDIC or NCUA.
• Low-risk: Money market accounts don’t carry the same risk as investment options where your returns ebb and flow with markets. Only the interest rate — not the principal balance — is variable in a money market account. 
• Convenient access: Money market accounts are great for short-term savings goals or as a place to stash your emergency fund, as you can easily access your funds when you need them. Most come with debit cards and the ability to write checks.

Money market account cons

• Limited monthly transactions: MMAs are subject to the same transaction restrictions as savings accounts. That means you can only make six “convenient” transfers (those made via check, debit card or electronic transfer) per month, or you’ll be charged a fee.
• Maintenance fees: Money market accounts sometimes charge monthly maintenance fees. These fees can often be avoided by meeting a minimum balance requirement.
• Interest is taxed: Like other forms of interest income, you will have to pay taxes to Uncle Sam for the interest earned in a money market account if it adds up to $10 or more a year. How much you owe is calculated based on your marginal tax rate.

Checking account pros and cons

While you might not always earn as much interest in high-yield checking accounts, they offer more liquidity than money market accounts.

High-yield checking account pros

• No transaction limits: Checking accounts don’t have maximum transaction limits. With a checking account, you can withdraw your funds in any amount, anytime you like. Some accounts may cap daily ATM withdrawals. 
• More access: Checking accounts typically have more money access options. For example, most checking accounts offer online bill pay, while it’s rarely available with money market accounts.
• Federally insured: Checking accounts receive the same deposit insurance as money market accounts — the FDIC insures accounts at accredited banks, while the NCUA insures those opened at accredited credit unions. 
• High interest rates: High-yield checking accounts offer interest rates that can meet or even exceed those on money market accounts.

High-yield checking account cons

• Balance caps: Most high-interest checking accounts limit the high interest rate to funds up to a certain amount. Any funds over that amount typically earn a significantly lower interest rate.
• Maintenance fees: Some high-interest checking accounts charge fees if you don’t maintain a certain balance or make a minimum number of transactions each month.
• Other fees: Beyond maintenance fees, some checking accounts charge for things like paper statements and overdrafts. Overall, make sure the interest you stand to earn is greater than the cost of all the fees. As with any financial agreement, make sure you read the fine print! 

Money market account vs. checking: Which should you choose?

When trying to decide between a money market account and a high-yield checking account, take into consideration how high a balance you typically carry and how many transactions you’re likely to make each month. 

• If you have a larger balance that you don’t withdraw from that often, consider a money market account.
• If you need to make more than six withdrawals a month, choose a high-yield checking account.
• If you don’t make large deposits every single month, you should probably consider a money market account.
• Terms vary by institution, but high-interest checking accounts usually require a significant amount of active management on your part to get the best rates.

When to use a money market account and a checking account

Thankfully, there’s no law that says you can’t open both a money market account and a high-yield checking account. You could have your paycheck or another source of income directly deposited in a money market account. Then, once a month, transfer the amount needed for day-to-day spending into a high-yield checking account.

If you shop around, you could get an attractive rate of interest on both accounts, satisfy the maximum withdrawal caps of Reg D and maintain the necessary level of monthly deposits and debit card transactions to get the reward rate on a high-yield checking account. 

If, on the other hand, your checking account offers a higher interest rate, and you’re able to maintain the monthly minimum balance, then it may make more sense to leave most of your funds in the checking account and make most transactions from it. Transfer leftover funds that could exceed the high-yield checking balance cap into the money market fund.

Both account types are valuable financial tools, either used alone or used in concert. Choosing one or the other — or both — helps you earn more interest than traditional savings and checking accounts offer while providing easy access to your funds.