If you need a relatively safe place to keep some cash, a money market might be the right choice. Differences exist, however, between money market deposit accounts and money market funds. Among the key distinctions are where to get your account, the way it works and how you use it.
Money market funds invest in conservative securities such as certificates of deposit, government securities and other liquid and relatively low-risk products. While the fund's yield fluctuates, the firm that manages it attempts, and usually succeeds, to keep the share price, or net asset value, of the fund at a constant $1. Money market deposit accounts operate similarly to checking and savings accounts, only with different restrictions and rates of return. The Federal Deposit Insurance Corp. guarantees the value of money market deposit accounts.
You can get into money market funds through brokerages and mutual fund companies. Generally, when you open a brokerage account, the firm places your cash deposits and proceeds in a money market fund. Most brokerages call these sweep accounts. They hold your cash until you invest it in stocks, bonds, mutual funds and other products. To get into a money market deposit account, you can visit a bank online or in person and open an account, much in the same way as you open a checking or savings account.
Money market funds and money market accounts usually offer ATM access. Both accounts typically provide check-writing privileges. While more common with money market deposit accounts, both options sometimes limit the number of transactions you can make each month. Money market deposit accounts tend to require a minimum balance in exchange for a higher interest rate than you could get in a checking or savings account. Money market funds vary in whether they require a minimum balance. They generally pay out a higher interest rate than money market deposit accounts.
Both types of accounts pay interest. Exactly how much depends on several factors, including macroeconomic conditions and your account balance. In any case, each firm you have one of these accounts with sends you a 1099-INT tax form at the end of the year. You must report the interest you earn from these accounts to the IRS.
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