Money Market Account

A money market account is a deposit account at a bank or credit union that pays interest at savings-account rates and adds limited payment features, typically a debit card, checks, or both. Because it is a deposit rather than a security, the balance carries federal deposit insurance on the same terms as any other deposit at the same institution, and the FDIC lists money market deposit accounts among the products it insures.

That first point is the one to fix before anything else on this page, because the near-identical name of a different product causes real losses. A money market fund is a mutual fund. It is a security, it is not covered by deposit insurance, and the SEC states plainly that there is therefore a risk you may lose some or all of the money you invested. A money market account is a bank deposit and cannot lose value in that way. The two products are frequently offered by the same institution and appear next to each other on the same screens.

The confusion is structural rather than accidental. Both products were built in the same era to pay money-market rates to ordinary savers, one inside the banking perimeter and one outside it, and nobody coordinated the names. So the similarity is not a coincidence to be laughed at, it is a signal that the two are competing for the same job with completely different protections.

Federal regulation names the product outright. 12 CFR 204.2(d)(2) provides that the term savings deposit also means a deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account, that otherwise meets the savings-deposit requirements and from which the depositor may make transfers and withdrawals to another account or to a third party, regardless of the number of such transfers.

But the tidy conclusion that an MMDA is legally a savings account rather than a checking account is an overstatement, and almost nobody says so. The same regulation defines a transaction account at 204.2(e), and (e)(2) sweeps in deposits on which the institution has reserved the seven days' notice right and that are subject to check, draft, negotiable order of withdrawal or other similar item, expressly including accounts described in paragraph (d)(2), which it then names in parentheses as savings deposits. So an MMDA that comes with checks is a savings deposit under (d)(2) and a transaction account under (e)(2) at the same time. The hybrid is legal as well as commercial.

Regulation D's six-transfer limit was deleted, not paused, and both of the usual summaries mislead. The Federal Reserve Board amended the regulation in 2020 to delete the six transfer limit from the savings-deposit definition, and the current text of 204.2(d)(2) permits transfers and withdrawals regardless of their number. But the Board's change permits rather than requires institutions to stop enforcing their own limits, and many still do, charging an excess-withdrawal fee under the account agreement. So "federal law limits you to six a month" is wrong, and "the limit was removed" is wrong for anyone whose bank kept one. The question to answer is what your own fee schedule says. That fact is more strongly associated with money market accounts than with plain savings, because the payment features make the limit easier to hit.

Tiered pricing is the practical catch, and it is where the advertised number stops being the number you get. Money market accounts are commonly priced in balance bands, so the headline annual percentage yield attaches to balances above some threshold and the rate below it can be a small fraction of that. Regulation DD requires an advertisement quoting a rate of return to state it as an annual percentage yield and to disclose the conditions attached, including any minimum balance, which is exactly where a tier is disclosed. Read the tier table rather than the headline, because on a modest balance a plain high-yield savings account with a single flat rate can pay more than a money market account advertising a higher one.

What remains is the ordinary comparison. Against a savings account, a money market account adds payment features and often a higher minimum balance. Against a checking account, it pays interest but is not designed for the volume of transactions a checking account handles. Against a certificate of deposit, it keeps the money reachable and gives up the fixed rate, since a money market rate is variable and the institution can change it at any time. Interest is ordinary income in the year it is credited and arrives on a Form 1099-INT.

You open the account with a deposit, the institution credits interest at whatever rate applies to your balance band, and you draw on it by transfer, debit card or check within whatever limits the account agreement sets. The rate is variable and can change without your agreement. The insurance is automatic and identical to that on the institution's other deposits.

A hypothetical example of what tiering does to an advertised yield. An account advertises 4.25% APY, with the tier table showing that the rate applies to balances of $25,000 and above and that balances below that earn 0.50%. Ruben deposits $8,000.

At the advertised 4.25% his balance would credit about $340 over a year ($8,000 × 0.0425). At the rate that actually applies to him it credits about $40 ($8,000 × 0.005). A plain high-yield savings account paying a flat 4.00% with no tiers would credit about $320 ($8,000 × 0.04), eight times what the money market account pays him, while advertising a lower number.

The insurance is identical in all three cases and so is the access. What differs is a pricing structure that lives in the disclosure rather than in the advertisement, which is why the tier table is the part to read.

Pros

• A deposit, so the balance does not fluctuate and is federally insured up to the applicable limit.
• Payment features that a plain savings account usually lacks, which suits money that has to be spendable from where it sits.
• Rates are typically better than checking and sometimes better than branch savings at the same institution.
• The old federal cap on monthly transfers no longer exists, so the account can be used as often as the agreement allows.

Cons

• Tiered pricing means the advertised yield often attaches to a balance band, and a smaller balance can earn a small fraction of it.
• Minimum balance requirements and monthly maintenance fees are common, and a fee can outweigh the interest on a modest balance.
• The rate is variable and can be cut the day after the account is opened.
• Banks may still enforce their own excess-withdrawal limits and fees, even though the federal limit is gone.
• Easy to confuse with a money market fund, which is a security and is not insured.
• Interest is taxed as ordinary income each year, whether or not it is spent.