The Complete Guide to Money Market Deposit Accounts

A money market deposit account (MMDA) is a special type of bank or credit union savings account with some features not found in regular savings accounts. Also known as money market accounts (MMAs), most money market deposit accounts pay a higher interest rate than regular passbook savings accounts. They also often include check-writing and debit card privileges. But MMDAs may come with restrictions that make them less flexible than regular checking or savings accounts.

History of Money Market Deposit Accounts (MMDAs)

Until the early 1980s, the government placed a cap or limit on the amount of interest that banks and credit unions could offer customers in savings accounts. Many institutions offered small appliances (such as toasters and waffle irons), along with other incentives to attract deposits as they couldn’t compete when it came to interest rates.

People began putting their savings into higher-interest-paying money market mutual funds (MMMFs), also known as money market funds (MMFs). These mutual funds are sold by banks, brokerages, and mutual fund companies.

Congress passed the Garn-St. Germain Depository Institutions Act of 1982 under pressure. It allowed banks and credit unions to offer MMDAs that paid a money market rate, which was higher than the previous capped rate. Money market deposit accounts are offered at traditional and online banks and credit unions. One of the key features of MMDAs, aside from paying higher interest, is the protection of your assets.

MMDAs Are Insured Deposits

MMDA deposits and earnings at a bank are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government. The FDIC covers certain types of accounts, including MMDAs, up to $250,000 per depositor per bank. This means if you have other insurable accounts at the same bank (checking, savings, certificate of deposit), they all count toward the $250,000 insurance limit. Joint accounts are insured for $500,000.

For money market deposit accounts taken out at a credit union, the National Credit Union Administration (NCUA) provides similar ($250,000 per member per credit union) insurance coverage. If you want to insure more than $250,000, the best way to accomplish that is to open an MMDA at more than one bank or credit union.

Money market mutual funds, however, are not insured by the government—even if you take one out at a bank. 

Features of MMDAs

Check-Writing and Debit Card

Many money market deposit accounts offer limited check-writing privileges and include a debit card with the account. That makes an MMDA a combination savings and checking account, which can be handy if you want to receive a higher interest rate but you only need to access your funds on a limited basis. 

Transaction Limits

Federal Reserve Regulation D placed limits on the number of withdrawals and transfers you could make from an MMDA to six each month. The types of transfers affected are pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers. That restriction was lifted in April 2020. But some banks may still limit the number of times you can make debit transactions from your MMDA.

Liquidity

Both money market deposit accounts and money market mutual funds offer quick access to your funds. Remember that although the federal government lifted restrictions, your bank may still limit the number of withdrawals and transfers you make from your MMDA. Individual banks and brokerages may also place limits on how often you can redeem shares of your money market mutual fund.

MMDA Fees and Minimums

In addition to transaction limits that your financial institution may impose, money market deposit accounts generally require you to deposit a minimum amount to establish an account and require you to maintain a minimum balance to receive the maximum interest rate.

Both money market deposit accounts and money market mutual funds charge fees. Fees are important because any service charge that is imposed on your account reduces your earnings or interest. In a money market mutual fund, the main fee is the expense ratio, which is paid to the fund company to pay the fund manager and other operating expenses.

Many MMDAs may charge a number of fees, including a monthly charge that kicks in if your balance falls below the minimum. Some institutions charge a fee no matter what your balance is while others waive the monthly fee if you make a regular monthly direct deposit. Minimum deposits, balances, and rules regarding fees vary among financial institutions.

Other fees may include check-writing fees for going over the account’s maximum number of allowed checks in a month, annual account service fees, or a fee if your account falls below a stated minimum balance.

Interest Rates

One of the original attractions of MMDAs was the fact that they offered a higher interest rate than savings accounts. And on average, MMDAs do continue to outperform savings accounts. MMDAs can offer higher interest rates because they are permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, which savings accounts cannot do.

Money market deposit account interest rates (as well as those of most deposit accounts) are variable, meaning they can change with economic conditions. How interest is compounded—yearly, monthly, or daily, for example—can have a substantial impact on your final return, especially if you maintain a high balance in your account. 

Interest vs. Dividends

Dividends (yields) produced by money market mutual funds tend to be slightly higher than the interest earned on money market deposit accounts. However, the return on both varies with the performance of the underlying investments, and neither typically keeps up with inflation. 

Reinvestment

You have the option to reinvest the dividends in your money market mutual fund. Reinvested dividends purchase additional shares in the fund. Interest in your money market deposit account is automatically added to the principal and compounded. Money market mutual funds typically maintain a net asset value of $1 per share. As your account grows, the number of $1 shares you own goes up. 

MMDAs vs. Other Deposit Accounts

Money market deposit accounts are not the only deposit accounts offered by banks and credit unions. Other accounts may include features (or even interest rates) that make them competitive with—or superior to—money market deposit accounts.

Passbook Savings Account

Regular bank or credit union savings accounts pay interest just like MMDAs, though the interest paid by MMDAs tends to be higher. Some regular savings accounts offer a slightly higher interest rate to compensate for the flexibility (i.e., check writing) offered by MMDAs.

Both savings accounts and MMDAs are FDIC- or NCUA-insured. Both allow you to make as many deposits as you like each month. Unlike MMDAs, however, regular savings accounts typically have no or a very small initial deposit or minimum balance requirement.

High-Yield Savings Account

Banks and credit unions also offer high-yield savings accounts and, depending on the institution, the interest offered may be higher than you can get with that bank’s MMDA. Just like MMDAs, high-yield savings accounts are FDIC- or NCUA-insured and may require a higher initial deposit, minimum balance, and maintenance fees, or have penalties if your balance falls below the required minimum.

Regular Checking Account

Checking accounts have one big advantage over MMDAs—unlimited transactions (checks, ATM withdrawals, wire transfers, and so forth). They are also FDIC- or NCUA-insured. This makes checking accounts perfect for daily financial transactions, such as writing checks, electronic bill payments, and access to cash through an automated teller machine (ATM). The main weakness of regular checking accounts is that they offer a very low (often zero) interest rate.

High-Yield/High-Interest Checking

This type of checking account—like high-yield savings—offers interest rates that rival and sometimes exceed those found with money market deposit accounts. As with MMDAs, these types of accounts come with a requirement to maintain a minimum daily balance and a penalty or fee for falling below that amount. High-yield checking accounts also frequently have a cap—for example, $5,000—above which the high-interest rate does not apply.

Some high-yield checking accounts require you to make a minimum number of debit transactions each month. All these stipulations can make maintaining a high-yield checking account a time-consuming chore. In other respects, high-yield checking is like regular checking, with unlimited checks, a debit card, ATM access, and FDIC or NCUA insurance. 

Rewards Checking Account

This type of checking account may offer an impressive sign-up bonus and other rewards, such as high yields, ATM fee reimbursements, airline miles, or cash back. The caveats are like those with high-yield checking: high fees unless you maintain a stated minimum daily balance, a required minimum number of debit card transactions per month, mandatory monthly direct deposits, and more, depending on the institution. Otherwise, rewards checking functions like a regular checking account as noted above, including FDIC or NCUA insurance. 

Certificates of Deposit (CDs)

A CD is a timed savings account. In exchange for a fixed interest rate that may be higher than you would get from a regular savings account or MMDA, you agree to deposit a set amount for a set term—three, six, nine, or 12 months or multiple years up to 10. Interest on your CD is compounded daily, weekly, monthly, or annually, according to the terms of your agreement with the bank or credit union.

If you keep the money in place until the CD’s maturity date, you will receive the maximum amount of interest and compounding. If you withdraw your money (or part of it) early, you pay a penalty, usually in the form of lost interest.

Some CDs (known as liquid CDs) don’t penalize you for early withdrawal of principal or interest or both but pay a lower rate of interest. CDs are FDIC or NCUA insured but typically offer no provision to write checks, withdraw funds with a debit card, or add to the balance once you purchase the CD.

Mutual Funds

Money market deposit accounts are sometimes confused with money market mutual funds. While both are considered good places to temporarily park cash because they invest in safe short-term vehicles such as CDs, government securities, and commercial paper, they are different in other ways.

Special Considerations

Mutual Fund Liquidity Fees and Gates

In October 2016, the U.S. Securities and Exchange Commission (SEC) enacted special rules for money market mutual funds that include the ability for funds to impose liquidity fees and gates in times of financial stress.

This means you could be charged a special redemption fee to cash out part or all of your fund, or the fund could impose a halt to redemption for a set period. These special rules do not apply to money market deposit accounts.

Taxes for MMDAs

Interest earned on most MMDAs is taxable, even if it is reinvested. If you receive more than $10 of interest in a single year, you will receive a 1099-INT to use for filing your income taxes. It doesn’t matter if your bank calls the interest dividends. It’s still subject to taxes. If your total interest from all Forms 1099-INT exceeds $1,500, you also must file a Schedule B, listing the name of each institution and the interest received from each.

If your MMDA invests in certain tax-free instruments (i.e., municipal bonds), some or all of the interest you earn may not be taxable. If you are not sure about your tax status, seek the advice of a trusted financial advisor. 

Risks and Returns of MMDAs

The combination of FDIC or NCUA insurance and low-risk investments makes a money market deposit account one of the safest investments available. The tradeoff, of course, is that MMDA interest rates—while higher than those found with regular checking accounts and passbook savings accounts—are much lower than the 8% to 10% historical average return you would receive with securities and other types of long-term investments.

While low-risk investments such as those found in MMDAs are considered very safe, they are not considered viable long-term investments. What MMDAs are very good for is as a place to put the money you do not wish to tie up as a long-term investment or principal you do not wish to risk—especially in later retirement years. MMDAs are also relatively safe places to keep money when the market is volatile. 

The Bottom Line

The decision to open a money market deposit account involves comparing many factors and deciding how important each is to you. For example, depending on the interest rate, your main concern about whether to choose an MMDA or a CD may be liquidity.

Between a money market deposit account and a money market mutual fund, ask yourself whether you are willing to trade security for a potentially higher return, as the money market deposit account is FDIC-insured and a money market mutual fund is not.

There is no rule restricting you to one type of account. You may want an MMDA as a place to park investable funds for quick access when the market makes a favorable turn or to cover emergency needs. Regular savings may be appropriate until you accumulate enough to open a money market deposit account or money market mutual fund. If you don’t need to access your funds immediately but still want security, a five-year CD might be a good place for your money.

The table below compares some of the more common features found in money market deposit accounts and other types of deposit accounts.

Finally, keep in mind that none of these accounts offers a return equal to the average return of 8% to 10% you are likely to receive investing in securities (stocks) and bonds in the long term. For that reason, most people use MMDAs and other savings deposit accounts as short-term solutions.

	MMDA	Savings	Checking	CD	MMMF
Interest Type	Variable	Variable	Variable	Fixed	Variable
FDIC-insured	Yes	Yes	Yes	Yes	No
Checks	Limited	No	Unlimited	No	Limited
Debit Card	Yes	No	Yes	No	Yes
Transactions/Month	Check with your bank	Check with your bank	Unlimited	Zero	Unlimited

Source: Investopedia.com