A money market account is type of high-yield savings account that you can set up at a bank or credit union. You often can get a bigger bang for your buck if you stow some cash in a money market rather than regular savings. As with anything, money markets have some downsides, and these include balance requirements and withdrawal restrictions.
Money market accounts have only been around since 1982, when Congress passed the Garn-St Germain Act. Among other things, the act was designed to create a principal-protected alternative to money market mutual funds that conservative investors had traditionally turned to during economic downturns. Despite being regarded as low-risk investments, money market mutual funds can lose money, whereas money market accounts are guaranteed by the Federal Deposit Insurance Corporation. As with money market funds, you can set up a money market account with taxable funds or with tax-deferred retirement money.
The Federal Deposit Insurance Corporation insures bank deposits on a per-account-holder, per-bank basis. Your total holdings at one bank are insured up to $250,000, and you can double your coverage by adding a co-owner to your account. You can extend your coverage even further, because the FDIC provides an additional $250,000 of protection for each pay-on-death beneficiary that you add to your account. The National Credit Union Administration provides identical levels of coverage for credit union members. This means you can keep your nest egg safe by spreading your cash between money market accounts at several banks or credit unions.
As with all savings accounts, money markets are subject to federal regulation D, which, among other things, limits monthly withdrawals from accounts. You can make no more than six withdrawals involving pre-authorized transfers, checks, online or telephone banking over the course of a month. Withdrawals involving in-person visits to the bank and ATM machines are unlimited. If you go over the monthly withdrawal limit, then you may have to pay a penalty fee. If you're a repeat offender, your bank may either convert the account to a non-interest checking or simply close it.
Fees and Interest
Many banks have minimum balance requirements for money market accounts, and you may have to pay a service fee if your average daily balance drops below a certain level. Money markets usually have tiered interest rates which means you earn more money when you keep higher balances in your account. Regular savings accounts tend to pay lower rates of interest but also have lower minimum balance requirements. Certificates of deposit are bank accounts that usually pay higher rates than money markets, but CDs are subject to hefty withdrawal penalties, while money markets are easily accessible.