Published in: Buying Stocks | May 7, 2019

Brokerage Account vs. Money Market Account: Which Is Right for You?

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Here’s how to decide whether a brokerage account or a money market account is a better place to park your money and earn a return.

Jar of dollar bills.

Image source: Getty Images.

Brokerage accounts and money market accounts each solve a unique need. One is better for savings that you can afford to set aside for years at a time, while the other is a great way to earn a predictable and reliable rate of interest on money you can access at any time you wish.

Here are the ins and outs of brokerage accounts and money market accounts, and how to decide which is right for you.

Brokerage accounts explained

A brokerage account is used to buy risk assets -- things like stocks, bonds, mutual funds, and ETFs -- ideally to hold for years at a time. For example, you might set up an IRA with a discount broker to set aside money for an eventual retirement, or a taxable brokerage account to complement your savings in an IRA and 401(k) you have through work.

Brokerage accounts are the best way to buy investment assets for the long haul, but they have few, if any, advantages for money you might need in the intermediate term. Money you might need to access in the not-so-distant future (emergency funds to protect against job loss, for example) is best kept in cash. And brokers pay nothing, or next to nothing, on cash you keep in your account.

When you should use a brokerage account

A brokerage account is a good choice under certain circumstances where you have money that you can afford not to touch for long periods of time. If the following statements apply to you, you’re probably a good candidate for a brokerage account:

  • You can afford to take risks -- A brokerage account is one of the best ways to buy investments including stocks, bonds, and funds. These investments generally offer higher returns than no- or low-risk alternatives (like money market accounts), but with higher risk of loss.
  • You’re saving for the long haul -- A brokerage account is best when you have money you can afford not to touch for five years or more. For example, U.S. stocks have been a great investment over long periods of time. Over all 20-year periods, U.S. stocks have generated returns in excess of inflation, helping investors build wealth over time. However, it’s anyone’s best guess how they’ll perform over the next month or even the next year. Since 1928, U.S. stocks returned about 10% per year, but in roughly one out of every three years, returns were negative. Putting money in the market for just one year is more of a gamble than an investment.
  • You want tax advantages -- Setting up an IRA by opening a brokerage account can give you some serious advantages when tax time rolls around. Contributions you make to a traditional IRA are tax deductible now, but you’ll pay taxes on your withdrawals in retirement. In contrast, contributions to a Roth IRA are not tax deductible, but when you withdraw money in retirement, you won’t be taxed at all on what you take out.

The most important thing to remember about brokerage accounts is that they’re just a container for investments. A brokerage account doesn’t generate a return -- the stocks, funds, bonds, and so on that you hold inside it generate the return. When you sign up for a brokerage account, you have the power to choose your own investments, picking from tens of thousands of stocks, bonds, and funds.

Money market accounts explained

From your perspective, a money market account operates in similar fashion as a high-yield savings account, with two major exceptions: Money market accounts typically pay a higher interest rate, and often come with a checkbook for the occasional times you might need to make a payment on demand. The money market account designation is more important for how the bank manages its customers’ money, but that doesn’t affect you in any way.

Here are three things that make a money market account:

  • Limit of six transactions per month -- Just as savings accounts are generally limited to six transactions per month, money market accounts are the same way. A MMA is not for people who want to use the account as a checking account -- you’ll go over the limit on monthly transactions, incur fees, and potentially have your account closed.
  • Higher minimum balance requirement -- There are exceptions, of course, but as a general rule, most money market accounts require that you keep a higher average monthly balance than a checking or savings account. Part of the reason banks are willing to pay a higher rate on money market accounts is because their MMA customers are expected to keep higher balances.
  • Higher interest rates -- In today’s competitive banking environment, banks use savings and money market accounts to compete for different customers. It’s not uncommon to see banks position their savings accounts for people who want more service -- ATM access, branch networks, etc. -- while marketing money market accounts to clients who almost exclusively care about getting the highest interest rate. The best money market accounts pay rates several times higher than normal savings accounts at your average banking institution.

When you should use a money market account

A money market account can be a great savings tool for money that you expect to use in the next few years, or money you can’t afford to risk in the pursuit of higher returns. Often, money market accounts offer the highest-possible interest rate you can earn on your money without taking risk or dealing with extra complexity. You get all the convenience of a savings account with rates that are way higher than the average interest rate paid on savings accounts.

If the following statements apply to you, a money market account may be a good fit:

  • You can’t afford to take risks -- A money market account is a great way to earn a relatively high guaranteed return on your money, which makes it a suitable place to keep your emergency fund or excess cash you might need at some point in the next few years or so. Money market accounts are FDIC insured up to $250,000, so even if the bank fails, you won’t lose your money. For this reason, you can look at money market accounts as a way to get a guaranteed return on your money.
  • You want high yields -- Of all the consumer accounts you can open at a bank, a money market account ranks up there with a certificate of deposit (CD) for offering the highest yields on your cash. Unlike a bank CD, though, a money market account allows you to withdraw at any time without penalty, which is very valuable when you want high rates and the ability to actually use your money when you want to.
  • You can keep a big balance -- Money market accounts typically require a higher balance, and may charge a monthly fee if you don’t keep a certain minimum account balance. It’s not uncommon for money market accounts to require minimum balances that range from $2,500 all the way up to $10,000 or more.

The key feature of a money market account is that as long as you have less than $250,000 in an FDIC-insured money market account, you’ll never have to worry about losing money. If you put $10,000 into a money market account right now, and refrain from withdrawing the money, your balance will only go up every single month when interest is deposited to the account.

That said, a money market account won’t make you rich, as most money market accounts pay a rate roughly equal to or slightly less than the rate of inflation. Therefore, a money market account isn’t a good way to save for long-term goals like retirement or sending your kids to college. Those are two goals for which brokerage accounts are better suited.

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