A money market account (or MMA) acts similar to a regular savings account but comes with a few key differences that can impact whether or not it’s right for you. One of the biggest attractions of a money market account is that you can often find better yields compared to other accounts. But it also comes with a few restrictions that can influence how you use your funds in the account.
Before you assume a money market account with a high APY is the best option, do some research to make sure you understand the nuances of this option. Here’s everything you need to know about money market accounts, including how they work and when they could be the right choice for you.
How a Money Market Account Works
When you pick a money market account, you’re essentially getting a type of savings account that has some overlapping functions of a checking account. You can start by opening an account either with a brick and mortar bank or an online bank. At that point, you’ll also deposit the amount of cash you want to keep in the account. Some banks require a minimum deposit, which you’ll need to meet in order to open the MMA.
When your account is up and running, you’ll receive checks to use as well as a debit card for using your deposited cash. However, there are federal regulations on how frequently you can make a withdrawal from your account. Otherwise, you can manage your money very similarly to a regular savings account.
Benefits of a Money Market Account
The primary reason people choose a money market account is that you can often get a higher rate than you would with other accounts. If you want to deposit a fairly large amount of money, even a fraction of a percentage point higher can make a major difference in your interest earnings each year. Money market accounts are often among the most competitive options out there when it comes to APY, so it’s smart to shop around.
Plus, you get the added convenience of getting a debit card linked to the account as well as the ability to write checks directly from your balance. You can also make ATM withdrawals if you’d like, or access your funds online. If you need quick access to your money, you won’t have to wait to transfer them to a separate account before using them. Instead, you have multiple options for making withdrawals to suit your specific needs.
A money market account is also FDIC-insured, so it’s a low-risk option for depositing your money, especially compared to placing your money in an investment like stocks or bonds. Even if your bank fails, your deposits in the money market account will be covered by the FDIC, at least up to the maximum allowed amount. While you might get higher yields investing in the stock market, there’s no guarantee at all, and you could even end up losing all of your cash. For risk-averse individuals, a money market account is a safer option.
Disadvantages of a Money Market Account
There certainly are a number of advantages that come along with a money market account. But there are also some limitations you should be aware of before opening an account. The biggest and perhaps most important one is that you can only make a certain number of withdrawals from your account each month.
Federal law caps this amount at six withdrawals per month, but your bank may limit you further by only allowing three per month. You can definitely depend on having the federal limit apply to your money market account, but also check to see if there are additional withdrawal limits that are specific to your bank. It’s not common, but certainly possible.
Another disadvantage is that money market accounts often come with a higher minimum balance. If you’re starting off with just a couple hundred dollars in your savings account, you probably won’t qualify for this savings tool from most banks. In order to qualify for an MMA with the best yield, you’ll likely need $1,000 or more. The limit varies with each bank, so search for the best option available to suit the money you have to deposit.
On top of an opening deposit minimum, you may also need to maintain a certain minimum balance in order to avoid paying a fee on your money market account or losing the better interest rate. Also consider how frequently and how much money you plan to withdraw from the account, which could impact your balance.
Comparing Account Options
If you’re intrigued by the benefits that come along with a money market account, your next step is to find the best offer available. There are several considerations to weigh, so don’t automatically assume the first account offer you see is the best one.
This also holds true for any bank you have an existing relationship with: just because you’re a current customer doesn’t mean you’ll get the most competitive rate available on the market. Plus, APY alone isn’t the only factor you need to think about.
Also, take a look to see if the account has a monthly fee. Some banks charge a small amount regardless of your balance, while others only make you pay a fee if your account drops below the minimum.
A final factor in choosing the best money market account is how frequently you can withdraw funds and what methods you can use to do so. You already know that the federal maximum is six monthly withdrawals, but make sure the bank doesn’t have even stricter standards.
Then find out if you get a checkbook and/or a debit card for the account. If you plan on making ATM withdrawals, pick a money market account from a bank that has free ATMs near you, otherwise, you’ll end up paying hefty fees every time you want to take out money. Seemingly small details like these can make or break how much you earn on interest and could potentially cut into your deposit amount as well.
Paying Taxes
The contributions you make to a money market account aren’t taxed, but the interest you earn each year is considered taxable income. As your money sits in the account, interest compounds daily and is paid to your account on a monthly basis. The technical threshold is that if you earned more than $10 in interest for the year, you must count the money as income and pay taxes on it.
Expect to receive an IRS form 1099-INT from your bank at the beginning of the year so you can prepare your taxes for the previous year. You can double-check the accuracy against your account statements to make sure you don’t declare more than necessary. It doesn’t matter if you withdraw any funds or not, you still have to pay taxes on the interest.
If your taxes are completed by a professional, just include the form 1099-INT with the other documentation you submit ahead of time to your tax advisor. If you use tax software on your own, you should be prompted to enter any relevant information in the appropriate field.
When you have more than one money market account or other interest-bearing accounts, you may have to enter more than one 1099-INT in order to complete your taxes accurately. Be sure to account for this additional income in your tax planning each year.
Who Should Open a Money Market Account
A money market account is a smart option if you want to balance liquidity with a higher interest rate. While you can’t make unlimited withdrawals, you do have ongoing access to your funds. Unlike a stricter savings vehicle, such as a certificate of deposit, there’s no maturity date to worry about with a money market account. If you know you’ll need the funds at some point in the near-term, or at least want that flexibility, then this is a good choice.
One ideal use for a money market account is for your emergency savings. You don’t need to tap into this money every day, but you may need quick access on an occasional basis. Alternatively, if you make quarterly tax payments, a money market account can help you earn interest on those funds up until you make your payment each quarter. Just be sure you don’t drop beneath the account minimum when your tax deadline arrives.
The Bottom Line
A money market account can be an effective tool in earning higher interest rates on your savings and giving you limited access to your money when you need it. While you can’t tap into your account whenever you want, you do get those checking-like features for easy withdrawals up to six times per month.
If you have a large amount of money to deposit, a money market account should be on your shortlist of options to compare. When you find one with a competitive interest rate and an account minimum you’re comfortable with, you can benefit from strong earnings each year from that high APY.
