What is a Money Market Account and How Does it Work (2024)

If you're looking for a safe but rewarding place to store savings but don't want to give up easy access to your funds, a money market account could offer just what you need.

Similar to a high-yield savings account, a money market account offers the security of a federally insured deposit account paired with a competitive interest rate. But unlike more traditional savings accounts, money market accounts make it easier to pay for big-ticket purchases directly from your account. It's the best of both worlds.
Below, we outline how money market accounts work, pros, cons, and the steps you'll need to take to open a money market account.

What is a Money Market Account?

Money market accounts—also known as money market deposit accounts (MMDAs)—are interest-bearing deposit accounts that are specifically designed to securely hold a depositor's savings. As with most savings accounts, they pay interest on the money that you leave in your account and they are typically FDIC insured. The amount of interest that a money market account offers varies from bank to bank.

But what really sets this type of account apart from other savings accounts is their unusual versatility. A money market account is essentially a combination of a savings account and a checking account: deposits are easy and unlimited and you have the abilitiy to make withdrawals by electronic or telephone transactions or conveniently make payments with a check.

How Does a Money Market Account Work?

More flexible than the average savings account and more generous than a checking account, money market accounts essentially work as a hybrid deposit account: part savings account, part checking account, but with limits.

As with any type of savings account, for example, you'll be paid interest on whatever money you put in, helping your savings to grow faster. But unlike other savings account options, money market accounts are also designed to be used as payment instruments, rather than simply as a place to safely store and grow your funds.

For example, you may be given checks linked to your account, so you can easily pay for purchases using funds drawn directly from your savings.
You can also make unlimited deposits with a money market account, as well as unlimited ATM withdrawals. However, depending on your financial institution, you may not be allowed to write as many checks as you want or freely transfer money from one account to another in the same way you would with a checking account.

Money market accounts are still traditionally considered savings accounts and may still be subject to the same rules and federal regulations as other savings deposit accounts. Although federal rules on savings accounts are more relaxed now than they once were (with, for example, the Fed's longtime six-transaction rule on savings account withdrawals no longer operable), that doesn't necessarily mean a bank or credit union has also relaxed its rules.

How Does a Money Market Account Earn Interest?

Your bank or credit union will pay you interest on any money that you leave in your account. The more you deposit, the more you earn, particularly since your interest earnings will compound over time, helping your savings balance grow faster.

When you open a money market account, your bank or credit union will typically offer you an interest rate called the annual percentage yield (or APY). This will be a variable interest rate, meaning the rate may rise or fall over the life of your account, depending on interest rate conditions and the market.

So, for example, if the Federal Reserve pushes up its target interest rate, the federal funds rate, your financial institution may also bump up the rates they offer to depositors. Similarly, if interest rates fall, then banks may also pay lower rates on savings accounts.

Money market accounts are known for offering relatively competitive interest rates. But remember: these are deposit accounts, not investment vehicles. So don't expect as big a return on your savings as you might get with a riskier or a less liquid savings option. You may also find higher rates through other deposit account options, such as high-yield savings accounts or certificates of deposit (CDs).

What are the Withdrawal Restrictions and Limits on Money Market Accounts?

It depends. Like all federally-regulated deposit accounts, money market accounts are subject to federal regulations, including the Federal Reserve's recently updated Regulation D. For many years, the Federal Reserve required financial institutions to limit the number of "convenient" transfers or withdrawals that depositors could make from a "savings deposit" account to just six per month. So, for example, a depositor could only electronically transfer money, write checks or make debit card purchases directly from their savings account six times per month. But those rules have now changed.

In April 2020, the Federal Reserve announced that it would no longer enforce the six-transaction rule specified in Regulation D since—due to other regulatory changes—it no longer saw the limit as necessary. It now advises financial institutions that they are free to formally classify savings accounts as transaction accounts if they wish, rather than savings deposit accounts, even if they are still publicly considered savings accounts. Either way, the suspension of the six-transaction rule still holds: banks and credit unions are free to set limits on withdrawals or relax them, depending on their needs.

The upshot for savers? Some financial institutions may continue to set limits on "convenient" transactions or charge certain fees for them, while others won't. When you're comparing money market accounts, check to see if there are any limits on withdrawals.

Also important: even before the Fed relaxed its rules, savers were still free to make transactions that were traditionally considered to be "inconvenient," such as ATM, mail, telephone, or in-person transactions. So even if a financial institution does set limits on the number of checks you can write or how many electronic transfers you can make, they may still allow you to withdraw cash from an ATM, make mobile transfers, or visit a teller without worrying about bumping up against a limit.

Money Market Account Benefits

Here's a quick overview about the benefits of money market accounts:

Competitive interest rates

Money market accounts usually feature higher rates of interest than other deposit accounts.

Convenience

Money market accounts make it exceptionally easy to store money in an interest-bearing account and use that money when needed. With unlimited deposits and ATM transactions, for example, you can sweep extra money into your money market account whenever you like, even if it's in very small amounts, and then freely withdraw that money from an ATM.

Flexibility

You can spend money directly from your money market account or use it as a vehicle to save up for big-ticket purchases or fixed expenses. Unlike some higher-rate savings options, you can easily access your money whenever you want.

In contrast, other savings accounts can be more restrictive. For example, certificates of deposit (CDs) also offer competitive returns but require you to leave your money in the account for a fixed term or else pay a hefty penalty for early withdrawal. Similarly, high yield savings accounts offer particularly competitive interest rates, but you can't use them to write checks.

Great for short-term savings

Money market accounts are ideal to store funds for shorter-term savings goals, such as saving up for a new car or a vacation. You'll not only earn interest on your savings, but you'll also be able to conveniently make payments directly from your account. For depositors looking to simplify their lives, that alone is a huge perk.

Money Market Account Downsides

There are also some potential disadvantages to consider:

Potentially limited transactions

Although the Federal Reserve no longer enforces a six-transaction limit on "convenient" withdrawals, some financial institutions may still enforce that rule. If so, you might not be able to withdraw money as freely and easily from your money market account as you may like.

Fluctuating interest rate

Unlike a CD account, the interest rate you receive in a money market account is variable—meaning the bank can change the rate at any time.

Not the best for long-term savings

While you'll earn interest on a money market account, it's not enough to keep up with inflation or achieve long-term goals like saving for retirement.

Minimum deposit

Some money market accounts require big deposits to open or ask you to keep large balances in your account, requiring a large upfront investment. However, that's not true for all money market accounts. For example, Synchrony Bank money market accounts do not require a minimum balance.

Are Money Market Accounts FDIC-Insured?

It depends on whether your financial institution is a member of the Federal Deposit Insurance Corporation (FDIC)—a deposit insurance agency backed by the federal government. If an FDIC member bank fails, you can get your money back up to an eligible amount. That's how FDIC insurance works in a nutshell.

If you leave your money with an FDIC-insured deposit account, such as a money market account, that account will be insured for up to $250,000 per account holder, per insured bank, for each ownership category. If you open other types of deposit accounts with the same bank, such as a checking account or CD, those accounts will also be insured separately for up to $250,000 per account. If you are a deposit account holder with Synchrony Bank, your money is insured by the FDIC.

If you deposit your money in a money market account offered by a credit union, on the other hand, the National Credit Union Administration (NCUA) will be responsible for reimbursing you in the event that the credit union closes or goes bankrupt and is unable to return your funds. However, your payout will be the same.

Regardless of whether you bank with a credit union or bank, you can safely deposit up to $250,000 per account holder into a money market account and your money will be automatically insured as long as you are opening an NCUA or FDIC-insured account. There is no need to separately apply for insurance.

However, that's not the case for financial institutions that are not federally insured by the FDIC or NCUA. So before you start banking with an institution, make sure to check if it's FDIC insured!

It's also important to note that money market accounts are not the same thing as money market funds. Money market funds are mutual fund accounts that are not federally insured.

Is a Money Market Account Worth it?

Consider your life stage and financial goals and avoid putting all your bucks in one basket. A smart savings strategy involves diversifying where you park your savings and allocating money based on when and how you plan to use it. Spreading your funds across a variety of accounts not only helps keep your savings safe as your money grows, but it also allows you to capitalize on different account features and tailor your strategy as you go.

Here are three tips for setting up your savings strategy:

1. Find your "why"

To determine the best account for a particular slice of funds, first, consider your "why" for the money that you are saving, then pinpoint your money's "what," "when" and "how." For example, ask yourself:
• Why do you want to save this money?
• What do you intend to use it for?
• When do you plan to use it?
• How do you expect to spend it?

2. Match your financial goals to your accounts

The key is to look for accounts that cater to your needs—not just now, but in the future.

For example, money market accounts are ideal for storing short-term savings, such as your emergency fund, that you want to keep accessible while maximizing your interest earnings. They also work well for holding general funds that you aren't yet sure how you'll use: For example, if you have some extra funds coming in, but don't know where to put them, a money market account's flexible features can buy you time while you consider the options.

However, a money market account isn't the best vehicle for growing long-term savings, though—especially if you want to optimize your earnings and are certain you won't use the money anytime soon.

When deciding how to allocate your savings, consider the perks offered by each account type and then ask yourself how likely you are to use an account's best features.

For example:

• Do you plan to use your savings to help fund upcoming expenses? Then writing a check directly from your money market account could be a real time-saver.
• Or do you have a medium-term savings goal in mind, such as a wedding or a vacation you plan to take in a few years? Then you may get a better rate of return, as well as more guardrails, to protect your savings, with a two-year certificate of deposit (CD). For example, CDs require you to keep your money in the account for a pre-set term, ranging from six months to five years (or otherwise pay a penalty). In exchange for your patience, you'll be offered a competitive rate that's fixed and guaranteed, making it much more predictable.
• Are you saving the money for a more distant goal, such as college or retirement? In that case, you're better off putting your money into a designated investment account, such as a 401(k), IRA or 529 Plan, that offers both higher returns, as well as special tax breaks. Keep in mind, though, that tax-advantaged money market accounts do exist for some long-term expenses such as retirement, so don't count them out when making plans. For example, Synchrony offers IRA Money Market Accounts with tax-free withdrawals.

3. Consider all your options

Use this chart to help you decide which type of deposit account is your best bet.

Start by comparing rates on money market accounts and looking for a low-fee account that offers a solid APY with few (if any) minimum balance requirements. For example, Synchrony's FDIC-insured money market accounts don't charge any account fees, nor do they require a minimum balance. As long as you keep your account over $0, you can maintain your savings, fee-free. Once you've settled on an account provider, apply online or visit a nearby branch.

How to Open a Money Market Account

If you're a new Synchrony Bank customer:

Synchrony Bank makes it easy to apply online and it only takes a few minutes. All you'll need is your information, including:

• Your name
• Address
• Contact information (e.g., email, phone number, etc.)
• Social Security Number
• Date of birth
• Occupation
• Employer
• Income or source of funds

If you have questions or need help filling out your account application, call 1-866-226-5638 to speak with a personal banker.

If you're already a Synchrony Bank customer:

Just sign into your account and follow the steps to begin. Once you set up a money market account online, you can fund your new account from either an existing Synchrony Bank account or a non-Synchrony Bank account.

The Bottom Line: Money Market Accounts Can Help Grow Your Savings

You'll be hard-pressed to find a more versatile savings option than a money market account. If you're searching for a flexible, low-hassle savings account that still offers a solid interest rate, then this could be the account for you. But don't forget that money market accounts do still come with significant limits.

Kelly Dilworth is a business and personal finance reporter, specializing in the intersection between money and life. She has covered consumer banking and lending for more than a decade and particularly enjoys writing about consumer behavior and psychology, new consumer research and how everyday banking products impact people's lives.