7 features of the best money market accounts
Not all money market accounts are created equal, just as not all consumers have the same needs. When choosing the best money market account for your hard-earned savings, you'll want to ask the right questions and make sure the account has the right features.
Money market accounts may be an ideal type of deposit account for you if:
- You have saved enough to meet minimum deposit requirements
- You want higher interest rates than regular savings accounts
- You want to be able to access your money at any time (subject to transaction limits)
- You want the security of FDIC insurance
Bear in mind that your foremost goal is to get a higher interest rate than you would with a savings account. That's why money market accounts were created in the first place. You'll also need to factor into your financial plan that the interest you earn is subject to income tax.
Here are the primary features of money market accounts (MMAs) and what you should know about them so you get the best money market account for your financial requirements:
- Minimum deposit and minimum required balance - Depending on the bank or credit union, each of these might be $1,000, $2,500, $10,000 or more. Many financial institutions have several types of money market accounts often referred to as "super" and "jumbo" when you get into the higher deposit and balance requirements. Shop around for what works best for you and the amount of money you want tied up in an MMA, because they aren't designed for frequent transactions.
- Penalties and fees - You are usually charged a fee if your balance dips below the required amount. How much is that fee? If you exceed the number of transactions allowed per month, you need to know how you'll be penalized, as well.
- FDIC insurance - MMAs are usually insured by the Federal Deposit Insurance Corporation (FDIC) to a limit of $250,000. But it never hurts to ask. You don't want to lose a big chunk of savings because the financial institution you picked isn't covered by the FDIC.
- Liquidity - MMAs are limited to six transactions per month, with no more than three of those being checks. An MMA would not work well as a primary checking and bill paying account. Some banks require the checks be written for a minimum amount, such as $500.
- Interest rates - Compare money market rates online for the best interest rate. Always use the annual percentage yield (APY) to compare different accounts. Look for banks that have consistently offered high rates. Check balance requirements and expiration clauses for any special or promotional rates. Make sure the MMA interest rate is higher than what an online savings account would pay at the same bank. Otherwise, there is not much advantage to an MMA.
- Direct deposit - Most banks offer direct deposit free of charge. You can pay yourself first by having your paycheck deposited directly into your money market account and then make one monthly transfer into your regular checking account for expenses. By putting your savings first, there's less chance you'll be tempted to tap into it.
- Bonuses or other incentives - Banks have become quite creative in finding ways to attract your business. Incentives can include:
- Bonus interest rate if you bundle multiple accounts at that bank
- Higher APY if you set up direct deposit or automatic transfer
- Bonus airline miles or rewards points
When you find an appealing incentive, read the fine print and ask questions. Is it really free? What hoops do you have to jump through?
Money market accounts make good emergency funds, ways to build savings or as a jumping-off point for longer-term investments. To make the best use of this type of account you should set up a regular schedule of when and how much you will add to it. You can then increase the account until you've decided on your investment strategy for longer-term savings.