How does a money market account work?
Key takeaways
- Money market accounts offer the best of savings and checking accounts: competitive interest rates and the option to easily withdraw your money.
- The FDIC insures money market accounts up to $250,000. Your account won't lose value if the stock market dips or dives.
- Money market accounts are ideal for saving for short-term goals, such as a new car or a down payment.
When you're looking for a place to keep your cash, you've got options. You might put it in a savings account, certificate of deposit (CD), money market account or stocks. Your deposit account choice depends on your financial goals and how easily you'll need to access the money.
A money market account (MMA) can be a good place to safely park your cash while seeing your balance grow. But before you open an account, you should know how a money market account works and what makes it different from other bank accounts.
We'll cover these topics:
How does a money market account work?
A money market account combines features from a savings account and a checking account — with some key differences.
Like a savings account, a money market account earns interest, and that rate is often (though not always) higher. A money market account can give you a better interest rate than a traditional savings account because it typically requires a higher minimum balance. You may need to keep $1,000, $5,000, or even more in a money market account. Some money market accounts also have tiered interest rates, so the higher your balance, the more interest you earn.
But if your balance dips below the minimum balance requirement, you may have to pay a fee. And some accounts may not start paying interest until your balance reaches a specific amount.
Like a checking account, you may get a debit card and checks when you open a money market account. But unlike a checking account, money market accounts typically limit the number of withdrawals you make in a month — sometimes up to six withdrawals per month or only above a certain amount, such as $500. This limitation is meant to encourage you to leave money in the account, as the bank leans on deposited amounts to make loans to other customers.
You don't risk losing interest if you pull money from the account before a predefined period. And, unlike the stock market, your account can't lose value.
When does a money market account make sense?
A money market account can be a low-risk way to grow your money, especially if you open an account with a competitive rate. The money in your account remains liquid — or easily accessible — making it ideal for short-term savings goals. For longer-term savings, such as retirement, you're usually better off investing in the stock market purchasing bonds or putting your money into CDs.
A money market account could benefit financial goals like:
- Building an emergency fund
- Saving for a new car
- Saving for a down payment on a house
- Saving for a vacation or special occasion
Are money market accounts FDIC insured?
FDIC insurance protects you if the bank where you keep your accounts were to fail. It insures money market accounts up to $250,000 per depositor, per financial institution, per category. That means:
- If you have a money market account at Bank A and a second one at Bank B, the FDIC covers both accounts for up to $250,000 each.
- If you have an account at Bank A in your name only with $250,000 in it and a joint account at the same bank with $250,000, the FDIC covers the full amount in both accounts.
- If you have an account with $260,000 in it, FDIC insurance covers $250,000 of your bank balance, leaving $10,000 uncovered.
The insurance covers the initial account balance plus any interest earned, up to the $250,000 limit.
What are some benefits & drawbacks of a money market account?
| Pros of a money market account | Cons of a money market account |
|---|---|
| Competitive APYs (annual percentage yield) | Some accounts have high minimum deposit (often starting at $1,000) |
| You can withdraw money or close the account at any time | Interest rates aren't always better than what you'd get from a savings account |
| You can get to your cash with a debit card for ATM access and/or check-writing privileges | Interest rates are usually variable, so they can drop |
| Your money is protected by the Federal Deposit Insurance Corporation | The number of monthly withdrawals may be limited |
Money market account FAQs
How do you open a money market account?
You open a money market account the same way you would a standard bank account. The first step is to choose your bank. You can work with your current bank, but shopping around is also a good move as a different institution may have a higher rate of return. When deciding on a bank, consider the minimum balance required, any fees and the interest rate. Also look at how frequently interest pays out, such as monthly or yearly.
Citizens has money market accounts that could match your needs and goals. Learn more to see if this type of account is right for you.
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Disclaimer: The information contained herein is for informational purposes only as a service to the public and is not legal advice or a substitute for legal counsel. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.