Guide to the Best Money Market Rates

Everyone is familiar with checking and savings accounts. There’s another common bank product that is also popular, although perhaps less famous -- the money market account (MMA).

The popularity is due to the fact that, all things being equal, the money market account pays higher interest than a savings account, and well more than a checking account (which frequently earns no interest at all).

The money market account is essentially a higher-yielding, slightly more flexible savings account.

Banks utilize MMA balances not for loans to other bank customers (as is generally the case with savings accounts). Instead they are typically channeled into short-term investments. This reduces the bank’s dependence on traditional lending and widens its investment base.

Those short-term investments aren’t junk bonds or penny stocks. Most bank investments drawn from money market account balances are very safe. Government bonds, for example, feature prominently in bank portfolios using these funds, as do certificates of deposit (CDs) and other limited-term but reliable securities.

This short-term investing provides another potential advantage for MMAs -- the possibility to capitalize on rate increases. There is much turnover in a short-term portfolio, so when rates start to climb, the instruments the bank is investing in should pay out better too. That rising tide raises the MMA boat, and account holders reap the benefits of a higher return on their money.

The interest rate is not the only draw of MMAs for consumers. This type of account is usually more flexible than a savings account in terms of access to funds. Checks and debit cards are frequently available to account holders, although they must conform with certain restrictions mandated by law (for more, see “The limits of a money market account” section below).

One important thing to bear in mind is that a money market account is different from a money market fund. As the name reveals, the latter is an investment fund. Money market funds are often listed on the stock exchange like any other tradeable security, taking their place next to stocks and bonds. The money market fund is not a bank account, unlike its near-namesake.

The money market account is a bank account, not a security. It is not publicly traded.

There are plenty of reasons for the popularity of money market accounts. Let’s run through a few of the more prominent ones:

High interest rates -- Although MMA headline interest rates aren’t much higher than those of savings accounts, the gap could be meaningful for those with a large pile. At the moment, the top-end MMAs pay out at around 2%, while the maximum for savings accounts tends to be slightly under that rate.

An account holder with $50,000 in funds who doesn’t further deposit or withdraw money would earn a cool $1,000 in interest in our theoretical top-end 2% interest rate MMA after a year. The same amount in a savings account at the same bank with a 1.75% rate would earn $875.

Ubiquity -- The MMA is a standard bank account type, so almost any lender in this country -- be it your local thrift, or the nearby branch of a nationwide bank -- offers them.

Certain banks offer perks and deals for people opening more than one financial instrument, so it might be worthwhile to have an MMA in the same institution that hosts your checking and/or savings account.

It’s good to be aware that banks aren’t the only game in town for MMAs. Other financial service providers (brokerages, fund managers, etc.) also have them on their product list.

Ubiquity means competition, so a bit of shopping around for an MMA could result in a higher interest rate, more/better features, or both. It’s worth taking the time to do at least some cursory research on the market.

Security -- Since they’re bank accounts and fall under the protection of the Federal Deposit Insurance Corporation, MMAs are insured for up to $250,000. That includes principal and accrued interest, and is per account holder.

FDIC insurance is automatic; no specialized sign-up is required. All MMA holders qualify for it (the same is true of all other common bank account types). Bank failures are quite rare these days, nevertheless having an FDIC umbrella over your head brings peace of mind. It also means one less potential danger to worry about in your financial life.

Easy access to funds -- It’s not hard to get your hands on the money stashed in an MMA; in that respect, the MMA resembles its cousin the checking account. Like checking accounts, MMAs typically come with debit cards for this purpose, and many also have check writing privileges.

An important caveat is that, unlike a checking account, the MMA is subject to several limitations as to the type and frequency of withdrawals and transfers. Read more on this in the next section.

Despite the many advantages of an MMA, there are a few areas where it can come up short for some. Let’s look at the other side of the coin.

Withdrawal and transfer restrictions -- The Federal Reserve places limits on withdrawal and transfer activities for both savings accounts and MMAs. The Fed generally considers these account types to be vehicles for savings, after all, and actively tries to discourage too much fund-draining from them.

It does this through its Regulation D, a rule that prohibits account holders from making more than six withdrawals and/or outgoing transfers per month. Any MMA holder that exceeds that limit is subject to a penalty fee from their bank or other financial institution.

That sounds restrictive and it can be, but it only covers certain types of withdrawals/transfers. These include:

• Electronic transfers

• Wire transfers

• Automated Clearing House (ACH) transfers

• Transfers by debit card

• Transfers by check

• Automatic or preauthorized transfers (such as bill payments arranged in advance)

Happily, other typical bank account transactions are not subject to this restriction. Falling under this category are such actions as:

• ATM withdrawals

• ATM transfers

• In-person transactions at a bank branch

Funding requirements -- Compared to checking and savings accounts, MMAs tend to impose more demands on their holders, particularly in regard to starting and ongoing balances.

At first this might seem like an unfair burden. In fact, it’s quite reasonable.

Since the MMA pays higher interest relative to checking and savings accounts, those interest payments become meaningful only at higher dollar levels. On the banks’ side, such requirements attract and keep a sizable amount of funds for them to use for those short-term investments. On the customer’s side, they maintain a certain level of said meaningful interest payments.

These are two of the more prevalent requirements in MMA funding.

Opening deposit -- In contrast to checking and savings accounts, MMAs often have a higher bar to clear with the account’s funding balance. It’s not uncommon for a bank to require an opening deposit well in the four figures to claim the advertised interest rate.

For example, account holders wanting to reap the promised 1.60% of the Capital One 360 Money Market® account must open their account with at least $10,000. If not, they earn at a 0.85% clip (although Capital One allows them to catch up; once the account funds rise to that level, the 1.60% kicks in).

In some cases, if you can’t make an MMA’s minimum, you won’t be able to open it.

The opening deposit requirement can be quite high in certain corners of this market; generally speaking, the higher the interest paid, the higher the minimum opening deposit. This isn’t to say that low- or no-opening deposit minimum MMAs don’t exist, because they do. But it’s more common for there to be a baseline.

Minimum ongoing balance -- Similarly, it’s typical for MMAs to mandate an ongoing balance minimum, often tracked daily.  This can be a standalone requirement without a minimum deposit, or it could be in addition to that deposit. Penalties for dropping below the minimum balance vary by financial services provider.

As with the opening deposit, generally the higher the ongoing balance required, the higher the interest paid on the account.

You (or yourself and your spouse, or you family) should certainly consider opening an MMA if some or all of the following applies:

• You have some discretionary funds -- the more the better! -- which aren’t being put to immediate use, nor likely to be in the foreseeable future. Idle cash does little good; earning interest, even at the current thin rates, puts money in a pocket.

• You’re willing to use the MMA only as a source of infrequent funding (for buys, investments, or for propping up other financial instruments) when strictly necessary. To hammer home an essential MMA truth, this is basically a facility for saving and earning.

• You already have a checking account (maybe at the same financial institution where you’re considering the MMA -- many banks give benefits and discounts to customers with more than one account). The checking account serves as the funding source for everyday expenses, as it earns miniscule, or even no, interest for the account holder.

Since it occupies the middle ground between the checking and the savings account, the MMA is a good instrument for those who want to straddle the key features of both.

The relatively tough opening and ongoing balance requirements for (most) MMAs mean that an account will have a solid financial base. With this, the account holder will earn more interest than they would in a savings account, and far more than with a checking account -- remember, many checking accounts pay exactly 0% interest.

At the same time, the funds in an MMA aren’t as tough to extract or move around as those in a savings account. The combination of linked debit card, book of checks (for MMAs that allow checking privileges, of course), and access to online banking turns the MMA into a spending tool. Withdrawals, purchases, and transfers are all at the account holder’s immediate disposal.

This does not mean, however, that they should dip into the well frequently or deeply. Again, this isn’t a checking account meant for free spending; there are rules and restrictions to numerous activities. Six is not a very high number when spread across a month; it’s easy to hit the wall quickly.

Care needs to be taken not to exceed these -- who wants to be socked with a penalty, after all?  Bottom line: The MMA is largely an account for saving, and only for the occasional purchase, or tide-us-over emergency funding.