What is a money market account?

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You are looking for a low-risk way to earn a competitive rate. Then, you stumble upon something promising: a money market account that pays a high yield. You have just one question: what in the world is a money market account?

A money market account is a financial tool for storing your savings safely, and it is quite similar to a traditional savings account. A money market account is great for when you want a low-risk way to earn a competitive rate on your cash.

Generally, a money market account pays a higher interest rate than a savings account; however, the account tends to include more restrictions, such as requiring a higher minimum balance. It wouldn’t be surprising for the financial institution to require $5,000 or more to open a money market account, for example.

You will, however, often have the ability to write checks from the account and/or a debit card to access your money. But a money market account is not a checking account, and there are limits on your ability to use these tools to move money in and out of the account. A money market account will allow up to six withdrawals or transfers a month because of a federal mandate.

Brick-and-mortar banks, online banks and credit unions offer the deposit account.

Are money market accounts FDIC-insured?

Your money is safe in a money market account if it’s offered by a 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 certificates of deposit. But again, your money is still safe in these accounts.

How do I choose the best money market account?

First and foremost, shop around.

As you do your research, one of the most important factors to consider is the product’s annual percentage yield. The annual percentage yield, or APY, alerts you to 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 is, the more your money will grow.

Next, look out for account restrictions. You’ll want to check to see whether or not the account requirements are too onerous to earn the yield or to sidestep a fee. It’s not uncommon to see hefty balance requirements. For example, BMO Harris Bank currently requires a $5,000 minimum opening deposit to earn 2.45 percent APY on its money market account.

Also, make sure you look for fees, including whether the account charges you a penalty if you close it within three months of opening it. 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’re looking to earn a higher rate without taking on risk for your shorter-term goals, you should consider opening a money market account. For example, you may want to open a money market account if:

• You want relatively easy access to your savings.
• Need a place to park your emergency savings or another shorter-term financial goal.
• Want the ability to write a limited amount of checks.
• Desire 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, so long as you aren’t depositing more than $250,000 — the amount FDIC-insured banks and NCUA-insured credit unions insure against losses — in a single account.

Importantly, a money market account is separate from a money market fund. The money market account is FDIC-insured; the money market fund is not.

What is a money market account good for?

If you want to park your savings somewhere but still have relatively easy access to it, a money market account is a good option to consider.

A money market account is a solid option to keep funds for your shorter-term savings goals, like a wedding or home repair. It’s also a good place to keep your emergency fund.

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 Bankrate data (0.25 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 certificate of deposit, 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 a CD.

Remember, 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. Bottom line: Do your research and shop around to find the account that works best for you.

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