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Banking

What's a money market account and how does it work?

Money market accounts mix some of the best benefits of both saving and checking accounts.

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When interest rates are high, it's important to evaluate the return you're getting from your bank accounts. Money market accounts (MMAs) have a lot to offer savers, combining higher-than-average APYs (when compared to traditional savings accounts) with convenient access to your money through debit cards and checks (a feature normally associated with checking accounts).

But there are tradeoffs — money market accounts can have higher minimum balance requirements, so they aren't ideal for everyone. And while the average money market account earns more money in interest than the average savings account, certain high-yield savings accounts surpass even the most generous MMAs.

Below, CNBC Select breaks down the advantages and disadvantages of money market accounts and how they work.

What is a money market account?

A money market account is a type of deposit account usually offered by banks and credit unions.

The funds you deposit into a money market account are insured by the FDIC (up to $250,000 per account), which makes money market accounts a safe option for your cash. These accounts sometimes require larger minimum balances compared to a traditional savings account, but they also tend to come with higher interest rates.

As interest rates have increased, some high-yield savings accounts have begun to offer better APYs than money market accounts. It's important you evaluate each deposit account on its own terms and not just blindly pick money market accounts over savings accounts (or vice-versa) when deciding where to park the money you need for short-term financial goals.

Compare the fees, minimum balance requirements and interest rate to hone in on the best money market account for you. Many of the top money market accounts (according to CNBC Select's rankings) require no minimum balance, have no monthly fees and offer generous rates of return. The Sallie Mae Money Market Account and Ally Bank Money Market Account both feature APYs of 4% or higher with no monthly fees.

Ally Bank® Money Market Account

Ally Bank® is a Member FDIC.
  • Annual Percentage Yield (APY)

    Up to 4.25% APY

  • Minimum balance

    None

  • Monthly fee

    None

  • Offer checks?

    Yes

  • Offer debit/ATM card?

    Yes

Terms apply.

Sallie Mae Money Market Account

Sallie Mae is a Member FDIC.
  • Annual Percentage Yield (APY)

    Up to 4.65% APY

  • Minimum balance

    None

  • Monthly fee

    None

  • Offer checks?

    Yes

  • Offer debit/ATM card?

    No

Terms apply.

How does a money market account work?

Money market accounts work just like other bank accounts — you deposit money, earn interest and can withdraw your money with relative ease. Money market accounts earn interest, just like savings accounts, but can include options normally only available with checking accounts, such as debit cards and checks.

Money market accounts are typically subject to the same withdrawal limit of six transactions per statement cycle you find with a savings account. However, the Federal Reserve has indefinitely lifted this restriction, so banks are not required to limit withdrawals from money market or savings accounts.

Just make sure you read the terms of the account carefully because even though banks and credit unions aren't required by the government to limit withdrawals, some have imposed their own limits.

Pros and cons of money market accounts

The average interest rate for money market accounts is currently 0.57%, which is higher than the average return for a savings account or interest-bearing checking account. But certain CDs and high-yield savings accounts offer better rates than most money market accounts.

With the option to have a debit card or use checks, many MMAs provide easier access to your money compared to the typical savings account. At the same time, MMAs may have transaction limits or excessive withdrawal fees, even though these limits are no longer required by the Federal Reserve.

Pros

  • Better rates on average compared to savings and checking accounts
  • Easier access to your money (compared to savings accounts)
  • Your deposits are insured

Cons

  • Higher minimum balance requirements (usually)
  • May have withdrawal limits or fees
  • Lower interest rates than other banking products, like some CDs and high-yield accounts

FAQs

Are money market accounts FDIC insured?

Money market accounts are classified as deposit accounts, so any MMA you open with a bank is covered by FDIC insurance. FDIC insurance protects up to $250,000 per person, per bank and per account type.

If you're the sole owner of a savings account, checking account and money market account at a single bank, the combined total of those accounts is insured for up to $250,000 because they all fall under the FDIC's "single accounts" category. To increase your coverage you could open an account with another bank or open a different type of account, like a joint account. Some accounts, like the Wealthfront cash account, automatically do this for you to increase your FDIC coverage.

MMAs opened with credit unions are insured by the National Credit Union Administration (NCUA). This coverage is the same as what the FDIC provides and protects up to $250,000 per person, per credit union and per account type.

How do money market accounts compare to savings accounts, checking accounts and CDs?

Money market accounts are most similar to checking accounts and savings accounts. You can make deposits and withdrawals with very few (if any) restrictions. Certificates of deposit (CDs) are slightly different. With a CD you are locking up your money for a set period and in exchange, you're hopefully getting a higher rate of return. If you withdraw money from a CD before its maturity date, you'll pay a penalty.

Despite the differences, MMAs, CDs and high-yield savings accounts all serve a similar purpose regarding saving and investing. They are all low-risk investment vehicles, which makes them ideal for short-term goals. If you're building an emergency fund or saving for a down payment on a house, a high-yield savings account, CD or MMA is a good option. But for long-term investing, these options typically won't have the same returns as a well-balanced investment portfolio.

What's the difference between a money market account and a money market fund?

Money market accounts and money market funds have similar names but are different types of savings vehicles.

A money market account is a deposit account you open with a bank or credit union. MMAs are safe because they are FDIC-insured. An MMA earns interest in line with the prevailing interest rate trends, which is typically lower than the long-term return you'd receive from investing in index funds or similar types of investments.

A money market fund is a specific type of mutual fund. Money market funds are not deposit accounts and therefore aren't insured by the FDIC. To invest in a money market fund, you purchase shares through a broker or investment firm. Money market funds are typically invested in safe, highly liquid investments like CDs or U.S. Treasuries. While these funds won't keep your money as safe as an insured deposit account, they're considered low-risk as far as investments are concerned

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Bottom line

A money market account is a type of deposit account you can open with a bank or credit union. This type of account is insured, so it's a safe investment. They also earn a relatively high-interest rate compared to a checking account or standard savings account.

However, you may be able to find better interest rates with the best high-yield savings accounts or a CD. And if you're investing for the long-term, an MMA may not be the best choice because you'll typically get better rates of return with other types of investments.

Catch up on CNBC Select's in-depth coverage of credit cardsbanking and money, and follow us on TikTokFacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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