Katherine Gustafson is an author and personal finance expert from Portland, Oregon. She writes about investing for Wealthsimple as well as having written for Forbes, Business Insider, TechCrunch, and LendingTree. Katherine is a past recipient of the Izzy Award for outstanding achievement in independent media. She has a BA from Amherst College and an MA from Boston University.
For U.S. savers, money market accounts (MMA) are a popular option. They’re a form of savings account that provide higher returns than traditional savings accounts but boast some of the accessibility features of checking accounts, such as check-writing.
The accounts’ benefits come with some demands, however: most notably that you maintain a higher balance in the account than savings accounts typically require. And you’ll only have limited access to your money, with withdrawals and transfers restricted to a very low number by law. Money market accounts are a good middle-of-the-road savings option for those who are willing to sacrifice some—but not all—access to their money in exchange for a higher rate of return than more accessible options offer.
What is a money market account?
MMAs, sometimes called money market deposit accounts (MMDA), are a particular form of savings account. You get very limited access to check-writing, as in a checking account, while also earning a rate of return that’s higher than a typical savings account. MMA accounts typically earn between 0.1% and 2% APR.
The ability to access the higher return of these accounts may come with certain restrictions, such as higher-than-average requirements for a minimum balance. Institutions may require a minimum balance of $1,000, $10,000, or another amount.
MMAs work most like checking accounts: Open your account, deposit money into it, earn interest, and withdrawal funds from the account by check or card. Interest usually compounds daily and is paid into your account every month.
While MMAs do offer check-writing and other transactional options, you’re usually limited to six transfers or withdrawals out of your account every month, and only three of those transactions can involve sending money to third parties or accounts at other banks, such as purchases by debit card. You are permitted to make as many transfers into your account as you’d like each month.
Money market accounts are a secure way to save your money; they are FDIC-insured, with coverage up to FDIC limits.
What is a tiered money market account?
While most money market accounts come with a single set of requirements and a single rate—a set minimum balance and a certain APR—some versions of this account have multiple sets, or tiers, of these stipulations. The idea is that the larger minimum balance you can maintain, the higher the APR you can earn. These accounts are called “tiered” because each APR will be associated with a certain tier of investment, such as a 0.15% APR for accounts that maintain a $5,000-$10,000 balance.
An example of this kind of money market account is the TD Growth Money Market, which can be opened with a minimum investment of $0.01 and comes with nine tiers. If you invest that single cent in the account, you’ll earn an APR of 0.05%, which is the rate for the $0.01-$999.99 tier. If you bump your account balance up into the $2,000-4,999.99 tier, you’ll earn 0.10% APR. And increasing your investment into the $5,000-$9,999.99 tier will push your APR to 0.15%. The top tier, with an investment of $250,000+, allows you to earn 0.35% APR.
Tiered money market accounts can be a good option for those who don’t have a large minimum investment to start out with but are determined to grow their investment quickly. Investing in a tiered account will allow you to take advantage of APRs that rise along with the amount of money you are saving in the account.
- Featured Snippet: Money Market Account Definition — A money market account is a form of savings account that provides a higher yield than traditional savings accounts, requires a high minimum balance, and comes with restrictions on transactions.
Pros & cons of a money market account
Money market accounts have distinct pros and cons.
Usually come with higher interest rates than regular savings accounts.
Typically FDIC-insured up to FCID coverage limits, ensuring your peace of mind.
Provide access to your money with checks, cards, and transfers, similar to a checking account.
Allow unlimited transfers into the account, which can be done easily via bank transfer.
Usually have high minimum balance requirements, with tiered accounts having certain tiers that require $250,000+ balances to maintain the highest APR.
Come with interest rates lower than more-restricted account types, such as certificates of deposit and retirement accounts.
Limit withdrawals and transfers out of the account to six times per month, which severely restricts how much access you have to your money.
Limit transfers to third-parties or other banks to three times per month.
Alternatives to a money market account
A money market account is one of a handful of handy savings options for U.S. account holders. Here are a few other options that may meet your needs better; compare and contrast to see which type of account is best for your savings goals and daily liquidity needs.
A checking account is the most accessible type of account; you get easy and immediate access to your money so you can meet any need that arises while keeping your money safe. Checking accounts come with many ways to access your money, from debit cards to checks to online bill pay tools to transfers. You can partake of all of these options as often as you’d like, and most don’t come with any added fees.
Checking accounts may come with monthly service fees, but there are many ways to avoid those. Some accounts waive the fee in exchange for meeting certain usage requirements, like doing one automatic funds transfer each month or maintaining a certain balance.
Savings account: Savings accounts are similar to checking accounts and money market accounts, though they are less accessible than checking accounts and have lower rates of return than money market accounts. In general a money market account is a better place to keep savings long-term than a savings account, but a savings account can be a good option if you don’t have enough money to maintain the minimum balance required in a money market. Interest rates for savings accounts may be compounded either daily, weekly, monthly, or annually. You may need to pay a monthly service fee, and there may be requirements for the amount of the deposit you need to open a savings account.
Certificate of Deposit (CD): CDs come with higher rates than savings accounts and money market accounts because you agree to invest your money for a set period of time and sign off on paying penalties if you break that agreement. The set amount of time is determined by the particular CD you invest in; it may be as little as several months or as long as a few years. The best candidates for CDs are savers who know they won’t need to access a given chunk of cash for a predictable amount of time.
Individual Retirement Accounts (IRAs): Retirement accounts are much different than money market accounts, in that they come with severe restrictions about withdrawing your money but also provide much higher returns over time. They are designed to keep your money growing tax-free for decades, so early withdrawals come with steep penalties as well as tax payments. IRA accounts, unlike 401(k) plans offered by employers, are individual requirement accounts; they allow you to save for your golden years independently. You can opt for a traditional IRA or Roth IRA, the latter of which is a post-tax account so that you can withdrawal your funds tax-free when you reach retirement age.
Canadian savings accounts: Canadian savers will find other options that offer returns as good as the best U.S. money market accounts but without the minimum balance restrictions that define money markets. Wealthsimple Save, for instance, is a savings account that comes with a high interest rate and requires zero minimum balance.
Money markets represent an excellent option for savers who want a rate of return that beats traditional checking and savings accounts, want to have some—albeit limited—access to their money, and are able to invest a sizable chunk of change to maintain a high balance.
If you’re looking for a place to stash some cash, check out the various money market options. Make sure to shop around to find the best rates, and consider whether a tiered plan would work well for your needs.
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