The Complete Guide to Money Market Deposit Accounts

A money market deposit account (MMDA), also known as a money market account (MMA), is a special type of bank or credit union savings account with some features not found in regular savings accounts. Most money market deposit accounts pay a higher interest rate than regular passbook savings accounts and often include check-writing and debit card privileges. MMDAs also come with restrictions that make them less flexible than a regular checking or savings account. This article covers what you should know about MMDAs to help you decide whether this type of account makes sense for you. (For more, see Money Market Account.)

Until the early 1980s the government placed a cap or limit on the amount of interest that banks and credit unions could offer customers in savings accounts. Many institutions offered small appliances (such as toasters and waffle irons), along with other incentives, to attract deposits, as they couldn’t compete when it came to interest rates.

People began putting their savings into higher-interest–paying money market mutual funds (MMMFs), also known as money market funds (MMFs). Money market mutual funds are sold by banks, brokerages and mutual fund companies. Under pressure, Congress passed the Garn-St. Germain Depository Institutions Act of 1982, which allowed banks and credit unions to offer money market deposit accounts that paid a “money market” rate, which was higher than the previous capped rate. 

Money market deposit accounts are offered at traditional and online banks and credit unions. One of the key features of MMDAs, aside from paying higher interest, is protection of your assets.

MMDA deposits and earnings at a bank are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government. The FDIC covers certain types of accounts, including MMDAs, up to $250,000 per depositor per bank. This means if you have other insurable accounts at the same bank (checking, savings, certificate of deposit), they all count toward the $250,000 insurance limit. Joint accounts are insured for $500,000.

For money market deposit accounts taken out at a credit union, the National Credit Union Administration (NCUA) provides similar ($250,000 per member per credit union) insurance coverage. If you want to insure more than $250,000, the best way to accomplish that is to open an MMDA at more than one bank or credit union. 

Many money market deposit accounts offer limited check-writing privileges and include a debit card with the account. That makes an MMDA a combination savings and checking account, which can be handy if you want to receive a higher interest rate but only need to access your funds on a limited basis. 

Federal Reserve Regulation D limits you to six transfers and electronic payments out of each MMDA or savings account each month. The types of transfers affected are: pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers.

You are permitted to make unlimited transfers in person (at the bank), by mail, by messenger or at an ATM. If you exceed the number of allowed transactions per month, you will receive a warning from the bank and may be assessed a fine. If you continue, the bank is required to revoke your transfer privileges, move you into regular checking or close your account. You can make as many deposits as you wish. 

In addition to transaction limits, money market deposit accounts generally require you to deposit a minimum amount to establish an account and require you to maintain a minimum balance to receive the maximum interest rate.

Many MMDAs have monthly fees that kick in if your balance falls below the minimum. Fees are important because any fee imposed will reduce your earnings (interest). Some institutions charge a fee no matter what your balance is, and others waive the monthly fee if, for example, you make a regular monthly direct deposit. Minimum deposits, balances and rules regarding fees vary among financial institutions. 

One of the original attractions of MMDAs was the fact that they offered a higher interest rate than savings accounts. The current national average MMDA interest rate, according to Bankrate, is 0.15%. The national average savings account rate is 0.09%. The highest available MMDA rate is 2.01%, and the highest savings account rate currently available is 1.90%. On average, then, MMDAs continue to outperform savings accounts. MMDAs can offer higher interest rates because they are permitted to invest in certificates of deposit (CDs), government securities and commercial paper, which savings accounts cannot do.

Money market deposit account interest rates (as well as those of most deposit accounts) are variable, meaning they can change with economic conditions. How interest is compounded – yearly, monthly or daily, for example – can have a substantial impact on your final return, especially if you maintain a high balance in your account. 

Money market deposit accounts are not the only deposit accounts offered by banks and credit unions. Other accounts may include features (or even interest rates) that make them competitive with – or superior to – money market deposit accounts.

Regular bank or credit union savings accounts pay interest just like MMDAs, though, as noted above, interest paid by MMDAs tends to be higher. Some regular savings accounts offer a slightly higher interest rate to compensate for the flexibility (i.e., check writing) offered by MMDAs.

Both savings accounts and MMDAs are FDIC- or NCUA-insured. Both allow you to make as many deposits as you like each month, and both restrict you to six transfers per Federal Reserve Regulation D. Unlike MMDAs, regular savings accounts typically have no initial deposit or minimum balance requirement. (For more, see Retirement Money Market Account.) 

Banks and credit unions also offer high-yield savings accounts and, depending on the institution, the interest offered may be higher than you can get with that bank’s MMDA. Just like MMDAs, high-yield savings accounts are FDIC- or NCUA-insured and may require a higher initial deposit, minimum balance and maintenance fees or penalties if you fall below the required minimum.

Checking accounts have one big advantage over MMDAs – unlimited transactions (checks, ATM withdrawals, wire transfers and so forth). They are also FDIC- or NCUA-insured. This makes checking accounts perfect for daily financial transactions, such as writing checks, electronic bill payment and access to cash through an ATM. The main weakness of regular checking accounts is that they offer a very low (often zero) interest rate.

This type of checking account – like high-yield savings – offers interest rates that rival and sometimes exceed those found with money market deposit accounts. As with MMDAs, these types of accounts come with a requirement to maintain a minimum daily balance and a penalty or fee for falling below that amount. High-yield checking accounts also frequently have a cap – for example, $5,000 – above which the high interest rate does not apply.

Some high-yield checking accounts require you to make a minimum number of debit transactions each month. All these stipulations can make maintaining a high-yield checking account a time-consuming chore. In other respects high-yield checking is like regular checking, with unlimited checks, a debit card, ATM access and FDIC or NCUA insurance. 

This type of checking account may offer an impressive sign-up bonus and other rewards, such as high yields, ATM fee reimbursements, airline miles or cash back. The caveats are like those with high-yield checking: high fees unless you maintain a stated minimum daily balance, a required minimum number of debit card transactions per month, mandatory monthly direct deposits and more, depending on the institution. Otherwise, rewards checking functions like a regular checking account as noted above, including FDIC or NCUA insurance. 

A CD is a timed savings account. In exchange for a fixed interest rate that may be higher than you would get from a regular savings account or MMDA, you agree to deposit a set amount for a set term – three, six, nine or 12 months or multiple years up to 10. Interest on your CD is compounded daily, weekly, monthly or annually, according to the terms of your agreement with the bank or credit union.

If you keep the money in place until the CD’s maturity date, you will receive the maximum amount of interest and compounding. If you withdraw your money (or part of it) early, you pay a penalty, usually in the form of lost interest. Some CDs (known as liquid CDs) don’t penalize you for early withdrawal of principal or interest or both but pay a lower rate of interest. CDs are FDIC- or NCUA-insured but typically offer no provision to write checks, withdraw funds with a debit card or add to the balance once you purchase the CD. (For more, see Money Market Accounts or CDs: Which Investment Account Is Better?) 

Money market deposit accounts are sometimes confused with money market funds. While both are considered good places to temporarily park cash because they invest in safe short-term vehicles such as CDs, government securities and commercial paper, they are different in other ways. (For more, see Introduction to Money Market Mutual Funds.)

Money market deposit accounts are savings accounts offered by banks and credit unions. Money market mutual funds are open-ended mutual funds sold by brokerages, investment companies and banks. 

Money market deposit accounts are FDIC- or NCUA-insured for up to $250,000 per depositor per institution. Money market mutual funds are not insured by the government – even if you take one out at a bank. 

Both money market deposit accounts and money market mutual funds offer quick access to your funds. Money market deposit accounts have that government-regulated six-transactions-per-month limitation, which money market mutual funds do not. Individual banks and brokerages, however, can place limits on how often you can redeem shares of your money market mutual fund or write checks. (See “Fees” and “Liquidity Fees and Gates” below). 

Dividends (yields) produced by money market mutual funds tend to be slightly higher than interest earned on money market deposit accounts. However, the return on both varies with the performance of the underlying investments, and neither typically keeps up with inflation. 

You have the option to reinvest the dividends in your money market mutual fund. Reinvested dividends purchase additional shares in the fund. Interest in your money market deposit account is automatically added to principal and compounded. Money market mutual funds typically maintain a net asset value of $1 per share. As your account grows, the number of $1 shares you own goes up. 

Both money market deposit accounts and money market mutual funds charge fees. In a money market mutual fund, the main fee is the expense ratio. This is a fee paid to the fund company to compensate the fund manager and pay other operating expenses. Other fees might include check-writing fees for going over the account’s maximum number of allowed checks in a month, annual account service fees or a fee if your account falls below a stated minimum balance. 

In October 2016 the U.S. Securities and Exchange Commission enacted special rules for money market mutual funds that include the ability for funds to impose liquidity fees and gates in times of financial stress. This means you could be charged a special redemption fee to cash out part or all of your fund, or the fund could impose a halt to redemption for a set period. These special rules do not apply to money market deposit accounts. (For more, see Money Market Regulation Changes: What You Need to Know.) 

Interest earned on most MMDAs is taxable, even if it is reinvested. If you receive more than $10 interest in a single year, you will receive a 1099-INT to use for filing your income taxes. It doesn’t matter if your bank calls the interest “dividends.” It’s still subject to taxes. If your total interest from all Forms 1099-INT exceeds $1,500, you also must file a Schedule B, listing the name of each institution and the interest received from each.

If your MMDA invests in certain tax-free instruments (i.e., municipal bonds), some or all of the interest you earn may not be taxable. If you are not sure about tax status, you should seek the advice of a trusted financial advisor. 

The combination of FDIC or NCUA insurance and low-risk investments makes a money market deposit account one of the safest investments available. The trade-off, of course, is that MMDA interest rates – while higher than those found with regular checking accounts and passbook savings accounts – are much lower than the 8% to 10% historic average return you would receive with securities and other types of long-term investments.

While low-risk investments such as those found in MMDAs are considered very safe, they are not considered viable long-term investments. What MMDAs are very good for is as a place to put money you do not wish to tie up as a long-term investment or principal you do not wish to risk – especially in later retirement years. MMDAs are also relatively safe places to keep money when the market is volatile. 

The decision to open a money market deposit account involves comparing all the factors discussed in this article and deciding how important each is to you. For example, depending on interest rate, your main concern about whether to choose an MMDA or a CD may be liquidity. Between money market deposit account and money market mutual fund, you must ask yourself whether you are willing to trade security for a potentially higher return, as the money market deposit account is FDIC-insured and a money market mutual fund is not.

There is no rule restricting you to one type of account. You may want an MMDA as a place to park investable funds for quick access when the market turns favorable or to cover emergency needs. Regular savings may be appropriate until you accumulate enough to open a money market deposit account or money market mutual fund. If you don’t need to access your funds immediately but still want security, a five-year CD might be a good place for your money.

The table below compares some of the more common features found in money market deposit accounts and other types of deposit accounts. Search online for the combination of interest rate and features that are most important to you.

Finally, keep in mind that none of these accounts offers a return equal to the average return of 8% to 10% you will receive by investing in securities (stocks) and bonds long term. For that reason most people use MMDAs and other savings deposit accounts as short-term solutions.

Source: Investopedia.com