What is a money market account? A guide for parents

If you’re a parent trying to raise financially savvy kids, you know there are numerous financial tools out there. One such tool is a money market account. So, what is a money market account? Let’s dive in to answer that and find out how to add it to your money-saving toolkit.

What is a money market account?

A money market account (MMA) is a type of deposit account that typically (but not always!) earns a higher interest rate than regular savings accounts. According to the Consumer Financial Protection Bureau, MMAs often require minimum balances to deposit or open the account.

How does a money market account work?

MMAs work similarly to regular savings accounts. However, they offer higher interest rates and typically require higher minimum balances. Some MMAs also provide check-writing privileges and debit card access, making them a hybrid between checking and savings accounts. 

Some MMAs may limit the number of transactions you make via certain methods, but most also come with debit cards. 

The advantages of a money market account

Money market accounts can be an excellent choice for individuals looking for a safe and flexible place to stash their cash. They offer competitive interest rates, and the funds are easily accessible. Additionally, MMAs are insured by the U.S government’s Federal Deposit Insurance Corporation (FDIC), so your money is protected up to the maximum allowable limit.

The drawbacks of a money market account

While MMAs have many advantages, they also come with a few drawbacks. For instance, they usually require higher minimum balances, and falling below this balance can result in fees. Additionally, MMAs have transaction limitations, which means you may only be able to make a certain number of transactions per month.

Some money market accounts may have lower annual percentage yield (APY) than regular savings accounts. So it’s wise to compare. 

Are money market accounts right for you?

Whether a money market account is right for you depends on your financial goals and circumstances. If you have a substantial amount of money that you'd like to keep safe while earning interest, an MMA might be a good choice. 

MMAs can also be an easy introduction to different ways to grow savings for kids and teens. However, if you're likely to dip below the minimum balance or need to make frequent transactions, an MMA might not be the best fit.

FAQs about money market accounts

Q: Are money market accounts safe?

A: Money market accounts are insured by the FDIC up to the maximum allowable limit.

Q: Can I lose money in a money market account?

A: As long as your account is insured by the FDIC, you won't lose your money even if the bank fails. However, you might be subject to some fees and penalties depending on your transactions and account standing. So it’s important to balance the interest rates with your transaction needs.

Q: What is the difference between a money market account and a savings account?

A: The main difference is that money market accounts often come with check-writing privileges and debit card access, making them a hybrid between checking and savings accounts. Stand-alone savings accounts don’t usually offer these perks. 

Q: Can you withdraw money from a money market account?

A: Yes, you can withdraw money from a money market account. However, there are usually transaction limitations. This is because money market accounts are intended as savings tools, not for everyday transactions like checking accounts. 

Q: Is interest earned on a money market account taxable?

A: Yes, interest earned on a money market account is typically taxable unless the account is part of a tax-advantaged retirement account.

Q: How often do money market accounts pay interest?

A: Most money market accounts pay interest monthly, but it can vary depending on the bank.

Q: Can I open a money market account online?

A: Yes, many banks allow you to open a money market account online.

Q: Do I need a minimum balance to open a money market account?

A: Most money market accounts require a minimum balance to open, and maintaining a minimum balance can also help you avoid fees.

Q: Can I add money to my money market account at any time?

A: You can typically add money to your money market account at any time, but always check with your specific bank or credit union for their policies. 

Q: Can a money market account be a joint account?

A: Many banks offer the option to open a joint money market account.

Q: Do money market accounts have monthly fees?

A: Some money market accounts have monthly fees, but they may be waived if you maintain a minimum balance.

Q: Can I transfer money from my checking account to my money market account?

A: Yes, you can typically transfer money between your checking and money market accounts.

Q: What happens to my money market account if interest rates fall?

A: If interest rates fall, the interest rate on your money market account may also decrease. It’s wise to regularly monitor the interest rates on any savings or investment accounts. 

Q: Are money market accounts covered by FDIC insurance?

A: Yes, money market accounts are insured by the FDIC up to the maximum allowable limit.

A money market account can be a beneficial financial tool for parents looking to earn interest on their savings while keeping their funds accessible and secure. As with any financial decision, it's important to do your research and consider your unique circumstances before opening an account.

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