What a money market account does

A money market account is a savings account that pays you interest in exchange for keeping money in it, with one catch: you can only withdraw a limited number of times per month. The bank takes the money you deposit and lends it out to other customers or invests it. In return, the bank pays you interest—a percentage of your balance each month. The interest rate is usually higher than a regular savings account but lower than a certificate of deposit (CD).

The tradeoff is access. With a regular savings account, you can withdraw money whenever you want. With a money market account, federal rules limit you to six withdrawals per month (though some banks set their own lower limits). If you exceed that, the bank may charge a fee, close the account, or convert it to a regular savings account.

Money market accounts are FDIC-insured at most banks, which means if the bank fails, the government guarantees your deposits up to $250,000. This makes them safer than investing the same money in stocks or bonds, but also means the interest rate will be lower.

Key Takeaways

  • A money market account pays interest on your balance in exchange for keeping money deposited and limiting your withdrawals to six per month.
  • The interest rate changes based on what the Federal Reserve does with interest rates, so your rate may go up or down over time.
  • You can write checks or use a debit card on most money market accounts, but only a limited number of times per month without penalty.
  • Money market accounts are FDIC-insured up to $250,000, making them safer than stocks but offering lower returns.
  • If you need to withdraw money more than six times a month regularly, a regular savings account is a better fit.

How the interest rate is set

The interest rate on a money market account is not fixed. It changes based on what the Federal Reserve does with its benchmark interest rate, which it adjusts several times a year. When the Fed raises rates, banks typically raise the rates they offer on savings products. When the Fed lowers rates, banks lower theirs.

Different banks also set different rates. A bank offering 4.50% APY (annual percentage yield) on a money market account is competing with another bank offering 4.25%. You can shop around and move your money to whichever bank offers the best rate. Some online banks offer higher rates than brick-and-mortar banks because they have lower overhead costs.

The rate you see advertised is the APY, which accounts for compounding—the way interest earns interest. If a bank advertises 4.50% APY, that means if you deposit $10,000 and make no withdrawals or deposits for a year, you will have $10,450 at the end of that year (before taxes).

How withdrawals and transfers work

Federal Regulation D limits you to six withdrawals or transfers per month from a money market account. A withdrawal means taking cash out at an ATM or the teller window. A transfer means moving money to another account, either at the same bank or a different one. Writing a check counts as a withdrawal. Using a debit card counts as a withdrawal.

If you exceed six withdrawals in a month, the bank can charge a fee—typically $10 to $25 per excess withdrawal. Some banks will close your account or convert it to a regular savings account if you repeatedly exceed the limit. The six-withdrawal limit exists because the Federal Reserve created it to encourage people to treat money market accounts as savings vehicles, not checking accounts.

The limit resets on the first day of each calendar month. If you make six withdrawals in January, your counter goes back to zero on February 1st, and you get six more withdrawals for February.

Minimum balance requirements and fees

Most banks require a minimum opening deposit to start a money market account—commonly $2,500 to $10,000, though some banks have no minimum. Some banks also require you to maintain a minimum balance to keep the advertised interest rate. If your balance drops below that minimum, the bank may lower your rate or charge a monthly fee.

Read the account agreement carefully before opening. The fee schedule will list what you pay for exceeding the withdrawal limit, what you pay if your balance falls below the minimum, and whether there is a monthly maintenance fee. Some banks waive fees if you set up direct deposit or maintain a linked checking account.

If you close the account within a certain period—often 90 days to six months—some banks charge an early closure fee. This is less common than it used to be, but it exists at some institutions, so ask before you open.

When a money market account makes sense

A money market account works well if you have money you want to save for a medium-term goal—six months to a few years away—and you do not need to touch it frequently. Examples include saving for a down payment on a car, building an emergency fund, or setting aside money for a vacation next year.

It does not work well if you need to withdraw money more than six times a month. In that case, a regular savings account is better, even if the interest rate is slightly lower. It also does not work well if you need the money in the next few months, because the interest you earn will be small and you might hit the withdrawal limit.

A money market account also makes less sense if you have a very small balance—under $1,000—because the interest you earn will be minimal. For example, $500 at 4.50% APY earns about $22.50 per year before taxes.

Money market accounts versus other savings options

A regular savings account has no withdrawal limits and usually a lower interest rate. Use it if you need frequent access to your money or want a place to park cash short-term.

A certificate of deposit (CD) locks your money away for a set period—three months, one year, five years—and pays a higher interest rate than a money market account. You cannot withdraw the money without a penalty. Use a CD if you know you will not need the money for a specific amount of time.

A high-yield savings account is similar to a money market account: it pays higher interest than a regular savings account and has the same six-withdrawal limit. The main difference is that a high-yield savings account usually does not come with a debit card or checkbook. If you want those features, a money market account is the better choice.

A money market fund (sold by investment firms) is different from a money market account (sold by banks). A money market fund is an investment product that is not FDIC-insured and can lose value. Do not confuse the two.

How to open a money market account

Most banks let you open a money market account online in 10 to 15 minutes. You will need a government-issued ID, your Social Security number, and proof of address (a recent utility bill or lease works). You will also need to fund the account with your opening deposit, either by transferring money from another bank account or by mailing a check.

Some banks offer a promotional rate for new money market accounts—for example, 5.00% APY for the first three months, then the standard rate after that. Read the fine print to see when the promotional rate ends and what the regular rate will be.

Once the account is open, you can deposit money by direct deposit, transfer from another account, ATM deposit, or check deposit. You can withdraw by ATM, debit card, check, or transfer, up to six times per month.

Frequently Asked Questions

Can I use a debit card on a money market account?

Most banks issue a debit card with a money market account, but each debit card transaction counts toward your six-withdrawal limit. Some banks do not issue debit cards for money market accounts. Ask the bank before you open whether a debit card comes with the account.

What happens if I exceed six withdrawals in a month?

The bank will charge a fee, usually $10 to $25 per excess withdrawal. If you repeatedly exceed the limit, the bank may close the account or convert it to a regular savings account with a lower interest rate. Check your account agreement for the specific penalty.

Is my money safe in a money market account?

Yes, if the bank is FDIC-insured. Your deposits are protected up to $250,000. If you have more than $250,000, only the first $250,000 is protected. Money market accounts are not investments, so your balance will not fluctuate based on market conditions.

Can I move my money to a different bank if the interest rate drops?

Yes. You can transfer your balance to another bank's money market account at any time. There is no penalty for moving your money. Banks compete for deposits by offering different rates, so shopping around makes sense when rates change.

How often does the interest rate change?

Banks can change the interest rate on a money market account at any time, though they usually change it when the Federal Reserve adjusts its benchmark rate. The Fed meets eight times a year. You will receive notice before a rate change takes effect, usually at least 30 days in advance.