A money market account, also called a money market deposit account, is an account that pays interest on funds in the money markets in case interest rates on the cash balances drop. Interest on money market deposits are tax-free and may be invested in money market accounts themselves. This allows individuals to have a second line of defense against sudden drops in rates, should they choose to do so.
Money market accounts come in several flavors, such as high-yield savings accounts, CDs, and even certificates of deposit (CDs). High-yield savings accounts are considered risky investments because of the high rate of interest, which can vary greatly. These types of deposit accounts are best suited for people who wish to accumulate a large sum of money but need to be sure they will be able to withdraw it when needed. Certificate of deposit accounts are available only to those who meet specific income requirements. Money market accounts are open to all U.S. residents who are at least 18 years old and who are U.S. citizens.
Before an individual decides whether to open a money market account, he or she must evaluate his or her financial circumstances and determine what sort of risk would be involved in making the monthly deposits. Some investors prefer high-yield savings accounts because they have a higher interest rate and a longer time frame to keep money in the account. Others prefer CDs because of their convenience, lower rate of interest, and ability to make numerous withdrawals.
Money market accounts typically have minimum deposit amounts. Typically, the smallest amount is required to start, and increasing the account balance increases the required minimum deposit. Minimum deposit balances for CDs are not required at all, and money market accounts are subject to the credit history of the depositor. If a person’s credit has a poor history, it could cause withdrawal penalties. To avoid these withdrawal fees, people may choose to open multiple CDs instead of having a single money market account.
Because money market accounts offer higher interest rate than most other traditional savings accounts, they carry a slightly higher cost of investment. Typically, high-yield savings accounts come with costs that offset the increased return on investment. In addition, a money market account usually requires more paperwork and reporting to federal and local tax authorities. Although some money market accounts do offer flexibility, such as being able to roll over funds to a second account, others require full documentation of earnings and expenses each quarter. The paperwork involved in opening and maintaining a typical savings account and a high-yield savings account can be overwhelming for most people.
A money market account may also have restrictions on the types of transactions that it allows and on the maximum amount of cash withdrawals during any month. For example, some providers limit the total number of cash withdrawals each calendar month, while others limit the cash withdrawal amount to a certain percentage of a balance. Lastly, some providers limit the number of checks that may be written each month. If you are concerned about the possible restrictions of a traditional savings account, then a money market account may be a good choice for you.