Define Money Market Account
Banks offer to their customers a variety of account types, such as savings accounts, checking accounts, certificates of deposit and money market deposit accounts. Each account offers different services and savings options. Money market deposit accounts are best for people who have a larger sum of money that they are not willing to risk losing and may need access to at any time.
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Interest Rates
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Interest rates on money market deposit accounts tend to be higher than savings accounts because of the minimum balance requirements. However, the Motley Fool financial services website warns that interest rates are likely to be lower than certificates of deposit because of the increased liquidity. Money market deposit accounts will usually not compare to the returns of riskier investments such as stocks, bonds or mutual funds.
Liquidity
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Liquidity refers to how easy or difficult it is to access the money in an account. Money market deposit accounts are fairly liquid. They are more liquid than certificates of deposit because account holders can transfer money six times per month, including three by writing a check, but not as liquid as checking accounts. In addition, money market deposit accounts typically have a minimum balance requirement, which may limit how much you can take out without incurring fees.
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Considerations
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Money market deposit accounts provide an incentive for customers to keep larger amounts of money in the bank because of the higher interest rates for larger deposits. The rates will vary over time: unlike certificates of deposit you do not lock in a specified rate nor is the money required to remain in the account for any specified period of time. Like other deposit accounts, the interest you earn is counted as taxable income.
Benefits
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Money market deposit accounts are covered by the Federal Deposit Insurance Corporation (FDIC) in case the bank fails. The coverage limit is $250,000 as of 2010, but the limit is scheduled to drop to $100,000 in 2014. This limit is per person, per bank. For example, if you had $200,000 in a money market deposit account at bank A and $200,000 in a money market deposit account at bank B, all accounts would be covered. However, if you had $200,000 in a money market deposit account in bank A and another $200,000 in a savings account in the same bank, only $250,000 would be covered.
Misconceptions
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A money market deposit account is not the same as a money market mutual fund. A money market mutual fund is an investment that is managed by the bank, investing in short-term debt securities. The returns on money market mutual funds vary based on the performance of the mutual fund and are not covered by FDIC insurance.
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References
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