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How to choose the best money market account
The best starting point for choosing a money market account is to look for the highest rate. You want your money to grow as rapidly as possible for maximum savings — the highest rate will do that for you. Just be sure to cross-check the best money market account rates with the best savings account rates, as you might find a better deal among savings accounts.
You may want to choose a money market account over a savings account when you need better access to your funds. In this case, always make sure you check to see whether your desired money market account actually gives you a debit card or check writing privileges. Not every bank and credit union offers these features with their money market accounts, which means they’re basically no different from a regular savings account.
Another thing to look out for are fees. There’s often a monthly fee on money market accounts, usually waived with a high balance requirement. You never want monthly fees to inhibit your savings, so figure out whether you can maintain the balance required to waive the monthly fee. If an account you’re looking at charges a fee and offers no option to waive it, you should consider a different account.
Ken’s methodology for choosing the top money market accounts
Even though there is no official definition of a money market account, I consider check writing to be an important feature that sets it apart from a savings account. Both money market accounts and savings accounts have the same withdrawal limitation as defined by federal regulation. That limits withdrawals (including checks) to no more than six per statement period except for ATM cash withdrawals and a few other types of withdrawals.
To be included in my top money market list, the account must offer check writing. In addition, the money market account must have a history of competitive rates.
#1 All America Bank
This bank’s Mega Money Market Account has offered competitive rates for more than ten years. The account is often the rate leader. However, the top rate only applies to balances up to $50k. The portion of the balance over $50k earns a much smaller rate.
The Mega Money Market Account has no monthly maintenance fees or minimum balance requirements. The minimum opening deposit is $500, with a limit of one account per individual. There is a $3 monthly charge for paper statements, with eStatements available at no charge.
All America Bank’s online division, Redneck Bank, also offers the Mega Money Market Account with the same rates and features.
#2 Sallie Mae Bank
The Sallie Mae Bank Money Market Account has offered competitive rates since 2016. The Money Market Account rates often exceed the rates of online savings accounts at the well-established internet banks. The Account has no rate tiers or maximum balance. There are no monthly service fee and no minimum balance requirements.
Sallie Mae Bank offers a bank-to-bank ACH transfer service that allows customers to initiate large transfers. One downside with the transfer service is a long hold time. When an ACH deposit of over $5k is made via Sallie Mae Bank's transfer service, the hold time for the amount over $5k is 10 business days.
This bank’s High Rate Online Money Market Account is fairly new, but from the time it was launched in early 2018, the Account has offered competitive rates. The top rate applies to balances up to $1 million. A $5k minimum balance is required to avoid a $15 monthly fee.
In addition to check writing, bill pay and debit/ATM cards are available for making withdrawals. However, a bank-to-bank ACH transfer service is not available.
This is a new online division of BankUnited which has been operating since the summer of 2018. The Money Market Account rate has remained competitive since BankUnitedDirect began operation. Minimum initial deposit is $2.5k, and a minimum balance of $2.5k is required to avoid a $15 monthly maintenance fee. Maximum balance per account is $250k.
In addition to check writing, a debit/ATM card is available for making withdrawals. Also, the bank offers a bank-to-bank ACH transfer service with no limits on the dollar amounts that can be transferred.
#5 Discover Bank
Discover Bank’s Money Market Account has a long history. I first wrote about the account in 2008. We’ve been tracking the rate since 2009, and during that time, the rate has always been competitive, even after Discover added the Online Savings Account in late 2009. Unlike other banks, the Money Market Account rate has consistently moved higher as interest rates have risen.
Unlike Discover Bank’s Online Savings Account, the Money Market Account has additional withdrawal options which include check writing, online bill pay and a debit/ATM card. The trade-off is a slightly lower rate and a minimum balance requirement to open the account and to avoid a monthly maintenance fee. A little higher rate is available for balances of at least $100k. However, even that rate has typically been below the Online Savings Account rate.
The Money Market Account benefits from Discover Bank’s mature online account management system which makes bank-to-bank ACH transfers easy, even for large amounts.
Money Market Account Rate History – Average APY (%) Rate Trend over Time
What is a money market account?
Money market accounts fall under the purview of the Federal Reserve’s Regulation D (Reg D), which considers them to be savings accounts. This is why money market accounts have the same transfer and withdrawal limitations as savings accounts, and are limited to six “convenient” transfers and withdrawals per month. This includes pre-authorized, automatic transfers; transfers and withdrawals initiated by telephone or computer; and transfers made by check, debit card or other similar method. Under Reg D, in-person withdrawals or transfers at a bank branch, at an ATM, or by mail or phone do not count toward the six-per-month limit.
How money market accounts work
While they may be classified as savings accounts by Regulation D, money market accounts typically work a little differently. Depending on the issuing institution, many MMAs come with a debit card or an ATM card, or even check writing abilities. This gives you more convenient access to your funds. Just don’t forget that despite these extra options, you’re still limited up to six convenient transfers and withdrawals per month.
Money market accounts earn interest. Historically, they were the go-to when people were looking for the highest savings rates available. In today’s unsettled rate environment, this isn’t exactly true, although in some cases there are banks and credit unions with money market accounts that offer higher rates than their savings account options.
Money market account benefits
Savers choose money market accounts because of their liquidity and flexibility. Although MMAs permit ATM withdrawals and check writing, technically they are not transactional accounts like a checking account. Nevertheless, money market accounts can be a great place to store funds for medium-term goals and needs. Place extra money in a high-yield MMA to snag the great rate, and you can also access the funds for occasional purchases — like buying furniture, for example. MMAs also work if you want to use it as a true emergency fund, strictly for unexpected expenses. You could also choose to deposit money regularly into the account and use it to pay rent, letting the money grow undisturbed at its great rate for the rest of the month.
Financial institutions usually tier their money market account rates. This rewards depositors with higher interest rates when they increase their balances. That doesn’t mean that all money market accounts disqualify low balances from a competitive rate, though. There are several online banks with MMAs with zero or low minimum balance requirements.
How your money is protected in a money market account
Your money market account funds are protected by FDIC insurance, as long as you open an account with an FDIC member bank. This is easy enough to check either on the bank’s website or with the FDIC’s own BankFind tool.
FDIC insurance protects your money in a bank account up to the legal limit per depositor per institution per ownership category. So if you have $250,000 in a money market account at ABC Bank, that’s totally insured through the FDIC. Anything above that won’t be though, so if you have cash in excess of $250,000, consider moving your money around between different banks to ensure you are fully insured.
FDIC insurance doesn’t extend to credit unions. Instead, federally chartered credit unions receive deposit insurance via the National Credit Union Administration (NCUA) and its National Credit Union Share Insurance Fund. This fund provides up to the legal limit in insurance coverage. State-chartered credit unions can also opt into NCUA insurance, but typically are regulated by the state supervisory authority where the credit union's main office is located.
The immediate technological protections on your account largely depend on the exact precautions put in place by individual institutions. This typically includes firewalls, encryption, two-step authentication, fraud monitoring, virus detection and the like. Institutions generally have pages on their websites detailing their security measures.
Fees to consider with money market accounts
Money market accounts often charge monthly service fees in exchange for higher rates. These fees depend on the issuing institution. If there is a fee, you may be able to waive it by maintaining a minimum balance, which can be quite high.
Be on the lookout for other, easily avoidable fees, especially if you sign-up for paper statements. Most deposit accounts nowadays waive a monthly fee if you sign up for electronic statements (eStatements), while paper statements can cost you a few dollars extra. We’ve even seen a $25 fee for paper statements, which is less than ideal.
Despite the ease of access provided by checks and debit/ATM cards, money market accounts are still limited up to six outgoing transactions according to Regulation D. If you exceed that limit, you’ll face an excessive transaction fee, often $5 or $10. Avoid these fees simply by paying attention to the number of your transactions each month.
How interest is calculated on money market accounts
The interest earned on money market accounts is calculated the same way as with other deposit accounts. The interest rate is the yield your money earns in one year, while the annual percentage yield (APY) indicates your yield over one year taking compounding into account.
Depending on the institution, your interest could be compounded daily, monthly, quarterly or even semi-annually. Typically, you’ll want to find a daily compounding account, as that grows your money the most efficiently.
Let’s say, for example, you deposit $10,000 into a new 2.25% APY money market account that compounds interest daily. If you don’t make any additional deposits or withdrawals, you’ll have earned $227.54 in interest on the account after one year. If we kept everything the same, but changed the compounding frequency to monthly, you’d earn $227.33 in interest. Change that to semi-annually and your interest drops to just over $226. These aren’t drastic changes, but a little more earned interest can go a long way.
Is interest earned from money market accounts taxable?
Any interest you earn on deposit accounts must be reported to the IRS. If you earn more than $10 in interest in a year, your institution will send both you and the IRS a 1099-INT form detailing your interest earned. You’ll need to file that with your tax return. If you’ve earned more than $1,500 in interest, you’ll also need to detail all the sources of that income on Schedule B of the 1040.
Your interest is taxed according to your marginal tax rate. So if you earned $100 in interest and your tax rate is 22%, you’d pay $22 in taxes on your earned interest.
You shouldn’t let that deter you from boosting your interest rates though. Earning $100 in interest and paying $22 in taxes still results in $78 more in your pocket. That’s a lot better than nothing.
Money market account vs. savings account
MMAs and savings accounts are very similar and are used for many of the same purposes. However, money market account rates derive their value from trading activity performed in the financial markets, whereas savings accounts normally pay interest rates based on the institution’s lending activities.
The difference means that the highest money market rates are typically higher than the highest savings account rates when interest rates in the broader financial markets are higher. For this reason, MMAs usually have higher minimum balance requirements than savings accounts.
Money market accounts may also offer easier access to your funds in case of emergency, such as an unexpected medical bill or a car repair. If the account includes a debit or ATM card, you’ll have an easier time withdrawing money or making a payment in a pinch, whereas savings accounts don’t offer that convenience.
Money market account vs. checking account
Money market accounts can resemble checking accounts thanks to their check writing availabilities and debit/ATM cards. Plus, they’ll earn at higher interest rates than a typical checking account.
Just don’t rely on a money market account to replace your checking account for daily purchases. MMAs are still limited by Reg D up to six transfers and withdrawals per statement cycle.
While both checking and money market accounts charge fees more often than savings accounts, remember that to waive a money market account’s fees you generally need a higher balance.
Money market account vs. money market fund
Money market funds are not the same thing as money market accounts. A money market fund (or money market mutual fund) invests in assets like commercial paper or government debt. Because you’re placing your money in risk investments, which fluctuate in value, there is always the possibility that you could lose money. There is never a risk you would lose your money in money market deposit accounts, so long as you maintain accounts below FDIC or NCUA insurance thresholds. Of course, money market funds also offer the potential to see higher returns than a typical deposit account.
Money market funds charge commissions for the funds you maintain and trade, which can take a chunk out of any income you see, especially if you have a low starting balance. Money market funds also offer the advantage of high liquidity and flexibility, especially when compared to other investment vehicles. Most money market funds allow you to write checks or make ATM withdrawals from your account balance, similar to money market deposit accounts.
Some banks and institutions offer both money market deposit accounts and money market funds, so it’s important to do some research into the differences before depositing your money. It may also help to double check the name and features of any “money market” account you’re about to open.