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Looking for a place to park your money for your shorter-term goals? A money market account offered by banks and credit unions is something worth considering.

These accounts are similar to savings accounts. While lesser known, they can pay competitive rates and are a great option for when you want a low-risk way to earn more interest on your emergency savings.

There are differences. Compared to savings accounts, money market accounts tend to require heftier minimum deposits and balances. On the other hand, they tend to offer higher interest rates and support more ways to move money out of the account, often including by checks.

No product is flawless, so make sure to understand the trade-offs.

Pros and cons of money market accounts

Advantages

  • Competitive yields: One of the biggest benefits are better returns. Generally, but not always, a money market account will pay more interest than a traditional savings account. The best money market accounts currently pay 2 percent APY or higher.
  • Your money is insured: If you open an account with an FDIC-insured bank or NCUSIF-insured credit union, $250,000 is safe even if the institution goes out of business.
  • Your cash is accessible: Your account often comes with a debit card and/or physical checks. There are limits to how often you can take money out of your account, however.

Disadvantages

  • High account minimums: Money market accounts often require a larger deposit than traditional savings accounts. It’s common to find a financial institution requiring $5,000 or more to open a money market account. You may also need to maintain a higher balance to avoid a fee or to get the highest APY available.
  • Lower interest than other bank products: Certificates of deposit can pay a more competitive yield. However, your money is less liquid in a CD than it is in a money market account. 
  • Restrictions on withdrawals: You aren’t supposed to use a money market account like a checking account. While you might write checks or use a debit card to move money out of your money market account, there are limits. A money market account will allow up to six withdrawals or transfers a month because of a federal mandate.

How do I choose the best money market account?

First and foremost, you should shop around.

As you do your research, one of the most important factors to consider is the money market account’s annual percentage yield. The annual percentage yield, or APY, indicates how much you will earn with compound interest over the year. In other words, it’s the interest earned on your first deposit as well as the interest earned on top of other interest earnings. The higher the number, the more your money will grow.

Next, review any account restrictions. Check to see whether the money market account requirements make it too difficult earn the yield or to sidestep a fee. It’s not uncommon to see large balance requirements. For example, BMO Harris Bank currently requires a $5,000 minimum opening deposit to earn 2.35 percent APY on its money market account.

Also, make sure to look for fees, including whether the account charges a penalty if you close it within three months of opening. Look out for monthly fees, transfer fees, shipping fees, inactive account fees and other penalties.

You can use Bankrate to compare money market accounts.

Should I open a money market account?

If you want to park your shorter-term savings somewhere that offers relatively easy access to it, a money market account is a smart option to consider.

For example, you may want to open a money market account if you:

  • Need a place to park your emergency savings or funds for a shorter-term financial goal, like a wedding or a home repair.
  • Want the ability to write a limited amount of checks.
  • Want a predictable APY and a federally insured account.

Can you lose money in a money market account?

A money market account is a safe place to park your money as long as you aren’t depositing more than $250,000 — the amount banks and credit unions insure against losses — in a single account.

Are money market accounts FDIC-insured?

Your money is safe in a money market account if it’s offered by an insured bank or credit union.

At banks, the Federal Deposit Insurance Corp. insures up to $250,000. At credit unions, the National Credit Union Association insures up to $250,000.

Should the bank or credit union fail, the FDIC or NCUA guarantees your money will remain safe.

For money market accounts, banks and credit unions can use your deposits for low-risk investments, like CDs. Still, your money is still safe in these accounts.

Are you taxed on money market accounts?

You must report all taxable and tax-exempt interest on your federal income tax return, even if it’s just a couple of dollars.

If you earn $10 on interest on an account, your bank will send you a 1099-INT for interest earned during that year. Even if you earn less than $10, you still need to report it on your tax return to the IRS. You will want to report the interest the year that you earn it.

Contact your accountant to answer your specific tax questions.

What is the difference between a money market account and a savings account?

Savings accounts and money market accounts have more in common than not: They pay interest, and they are designed to keep you saving. But there are a few distinctions that should help you choose the product that suits your needs best, including:

  • Generally, you will have to park more money in a money market account than you will in a savings account.
  • The money market account, on average, pays twice the savings account APY, according to August Bankrate data (0.23 percent APY vs. 0.1 percent APY).
  • With a money market account, you can get checks. Don’t expect this tool in your savings account.

If you are deciding between a money market account and a CD, evaluate your goals. A CD could pay you a more competitive rate than a money market account, but your money is more liquid in a money market account than in a CD.

There are always exceptions. Some savings accounts pay higher yields than money market accounts, and not all money market accounts offer ATM access or check-writing privileges.

What is the difference between a money market account and a money market fund?

While money market accounts and money market funds have similar names, they are very different. Most notably, money market funds offer no FDIC insurance, and you could lose your principal. Here is a breakdown on their primary differences.

Money market account Money market fund
Purpose of account For your emergency fund or shorter-term savings goals Often for individual investors who are seeking a parking spot for their cash
How to invest Deposit money at a financial institution online or in person Buy shares at a brokerage, bank or a mutual fund company
Accessing funds Can withdraw money up to six times per month You have ready access to cash. You can even get it same day
Insurance coverage Up to $250,000 per bank or credit union customer No FDIC or NCUSIF insurance (even when you buy them through a bank)

Bottom line

If you’re looking for a place to park your emergency savings, a money market account is worth considering. These accounts are safe bets to store your cash. If you’re looking to make frequent withdrawals from an account, look elsewhere. Do your research and shop around to find the account that works best for you.

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