Is it smart to open a money market account?
Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.
Money market accounts are known for offering relatively competitive interest rates. But remember: These are deposit accounts, not investment vehicles. So don't expect as big a return on your savings as you might get with a riskier or less liquid savings option (like investing in stocks).
Indirectly losing money, however, is a downside of money market accounts. Indirect loss can occur if the interest rates tied to the account fall, thus diminishing the initial return value of your account.
What Are the Benefits of Money Market Accounts? Some of the benefits of MMAs include higher interest rates, insurance protection, check-writing, and debit card privileges.
| Account | National average money market account | Sallie Mae Money Market |
|---|---|---|
| Deposit amount | $10,000 | $10,000 |
| APY | 0.68% APY | 4.65% APY |
| Earnings after six months | $33.94 | $229.86 |
| Earnings after 1 year | $68 | $465 |
While MMAs are generally considered very low risk, you can lose money in these accounts under some circ*mstances. One way to lose money in a money market account is to incur more fees than the account earns in interest income.
Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.
Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
Your money is not bound for a predetermined duration. Instead, you can withdraw funds when needed, giving you control over your finances. So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed.
Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time.
Do you pay taxes on money market accounts?
Taxable money market funds, also known as prime money market funds, usually offer higher yields than tax-exempt funds, but any income is subject to taxes. Prime funds invest in corporate and bank debt issued by U.S. and international entities.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.
If you're saving for something you'll need the money for in less than three to five years, saving in a money market fund may make sense for you. Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.
You can withdraw money from your money market account whenever you'd like. However, your bank may place limits on how many withdrawals you can make in a single statement period. Additional withdrawals typically incur a fee.
- As of May 2024, no banks are offering 7% interest rates on savings accounts.
- Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
- Redneck Bank – 4.90% APY.
- First Foundation Bank – 4.90% APY.
- Sallie Mae Bank – 4.65% APY.
- Prime Alliance Bank – 4.50% APY.
- Presidential Bank – 4.37% APY.
- EverBank – 4.30% APY.
- BankUnited – 4.25% APY.
- U.S. Bank – 4.25% APY.
5% APY: With a 5% CD or high-yield savings account, your $50,000 will accumulate $2,500 in interest in one year. 5.25% APY: A 5.25% CD or high-yield savings account will bring you $2,625 in interest within a year.
- Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. ...
- Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
Are money market accounts safe if bank fails?
First and foremost, money market accounts are typically safe because they're insured by the federal government. If you open a money market account at a federally insured bank, the Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 of your cash per bank, per depositor.
Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.
The Federal Reserve has hiked interest rates this year, pushing money market accounts to offer interest rates that are actually higher than the top savings account rates right now.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Some people choose money market accounts over savings accounts because they offer higher interest rates. While the difference in earned interest can be small, it might be enough to offset possible liquidity constraints posed by money market accounts, if you're are unlikely to need quick access to your cash.
