Commercial bank deposits saw substantial growth after the beginning of the Covid-19 pandemic, according to the Federal Reserve Board.

Consumers were depositing more cash into savings accounts, checking accounts and certificates of deposit (CDs). And many also poured funds into money market accounts.

A money market account (MMA) holds your cash while earning interest on the balance. The interest rates for money market accounts tend to outperform traditional savings accounts, but they often have limitations and balance requirements.

What is a money market account?

A money market account is a type of savings account that provides some of the best features that you’d find with a checking or savings account. With a money market account, you’ll earn interest on your deposit like a savings account but have check-writing privileges and debit card access, similar to a checking account.

You’ll typically earn a higher interest rate with a money market account, although the minimum deposit required can be higher than regular savings accounts. And with certain transaction limitations potentially put in place by the bank, a money market account isn’t meant for everyday access. Even though you’ll have access to the funds, there are some transaction limits and minimum balance requirements to avoid bank fees.

You can think of a money market account as a safe place to park your money — while earning a higher interest rate — but with the benefit of being able to access your money a few times per month. When compared to a checking or savings account, it allows you to come out ahead in terms of interest earned but without being locked out of your money, as you’ll find with a certificate of deposit (CD).

“[Money market accounts] offer the best of breeds among checking and savings accounts,” said Lee Huffman, former bank vice president and current personal finance expert at BaldThoughts.com, a financial advice website.

The best money market accounts

Money market accounts may have higher minimum balance requirements than regular savings accounts, but if you have the funds available, one of these accounts could be a valuable place to hold your money for the short term.

How do money market accounts work?

A money market account is a hybrid of a savings account and a checking account. You open it like you would a checking or savings account, make an initial deposit and receive your debit card and checks, if available.

You can use your money market account like a savings account to earn interest on the money in it. Most money market accounts allow you to set up direct deposits and pay your bills online.

Understanding the interest rates on money market accounts

Money market accounts typically have compounding interest, meaning you get paid on your original balance and any earned interest. Interest payments are usually credited to your account monthly.

The annual percentage yield is variable, meaning the rate can change based on market conditions.

“Whether it’s money market or savings accounts, the general level of interest rates in the economy is going to affect the rates on both of them,” said Dr. Ajay Patel, professor and chair in finance at Wake Forest University. “As the Fed funds rate goes up and down, banks will readjust the rates that they pay on money market accounts to ensure that the money stays in the financial institution and doesn’t leave.”

Financial institutions often pay higher interest rates to MMAs with higher balances, so the more money you put into it, the better.

Fees and limitations associated with money market accounts

Banks may charge you fees related to your money market account. Watch out for:

Monthly maintenance fees
ATM fees
Fees for exceeding transaction limits
Transfer fees
Fees for falling below the minimum required balance
Inactive account fees

You may also be limited in the number of transactions you can complete each month.

Pros and cons of money market accounts

Pros

Cash access: You can use your debit card to withdraw cash when you need it, and you may also be able to write checks.
Earns interest: Money market accounts earn interest similar to savings accounts, and some MMAs offer yields that are competitive with the best cd rates and the APYs paid by the best high-yield savings accounts.
Use it like a bank account: You can use your money market account to pay bills online, make transfers to savings or investment accounts, and receive direct deposits.

Cons

Fees: Some money market accounts charge monthly maintenance fees. You may be able to get the fee waived by maintaining a certain balance or making direct deposits.
Minimum requirements: Some banks require a minimum deposit to open an account or a minimum balance to maintain it. Sometimes, you may need to meet minimum requirements to avoid fees.
Transaction limitations. Some money market accounts limit the number of transactions you can make per month, usually around six per statement cycle. This limit varies by bank and account and isn’t universally enforced.

Money market accounts vs. other savings options

If the bank requires a minimum deposit to open an account, make sure you have the cash or information for an electronic transfer.

Some banks may give you a higher APY if you make a larger initial deposit.

When to choose an MMA over a savings account

“The benefit of a money market account, in most cases, is that it provides a marginally higher interest rate,” said Patel.

According to April FDIC data, the national average deposit rate on money market accounts was 0.66% compared to 0.46% for regular savings accounts. Since money market accounts tend to pay higher rates than traditional savings accounts, they may be a better choice for optimizing yields.

“Another benefit of a money market account relative to a savings account is the ability to access those funds,” Patel said.

Some banks grant access to checks or a debit card with their MMAs, allowing you to pay for expenses straight from the account. This convenience factor makes them ideal for emergency savings, vacation funds and business expenses.

However, MMAs often have higher minimum opening deposit and balance requirements compared to traditional savings accounts. A regular savings account may be the better option if you don’t have much to invest or are uncertain about maintaining a specific balance to avoid a fee.

If you’re confident in meeting the minimum requirements, you can earn an excellent rate with an MMA while keeping your funds liquid and easy to access.

Tips for choosing a money market account

If you’re thinking about getting a money market account, do your research to find the right one.

Compare different options. Consider different banks, credit unions and online lenders to see which offer the highest interest rates, fewest fees and easiest ways to qualify and apply.
Find accessibility. Think about what you want out of an account. Some prefer local branch access, while others prefer an online-only banking structure with a stellar mobile app.
Check requirements. See what you need to qualify for a money market account at each institution. For instance, what’s the minimum opening deposit requirement or how much do you need to maintain your account to avoid a monthly fee?
Look at perks and bonuses. See which accounts offer high APYs without meeting too many stringent requirements. Add extra accounts to see if you qualify for any sign-up bonuses or perks.

Is a money market account right for you?

If you’re looking for a saving option that pays a competitive interest rate while allowing limited access to your funds, a money market account may be right for you.

It’s an excellent way to separate your savings for a specific goal away from the rest of your money. For example, you might use a money market account to contribute to savings for a vacation, new car or wedding.

Money market accounts are not ideal for everyday banking, so consider a checking account without transaction limits if you’re looking for an account for regular use.

If you’re confident that you won’t touch the fund for a set period of time, CDs may offer higher, fixed interest rates depending on their terms.

Frequently asked questions (FAQs)

Money market and savings accounts are similar. The biggest difference is that money market accounts usually offer check-writing privileges and savings accounts usually don’t. A money market account also typically offers a higher interest rate but requires a larger deposit.

A money market account is liquid, which gives you access to money from the account when needed. With a CD, your funds are locked for a set time period, which means you typically can’t touch the funds without a penalty until that time frame is over. However, you’ll find that CDs typically offer a higher interest rate.

Some of the advantages of a money market account include high interest rates, check-writing ability, potential debit card access and federal insurance through the FDIC for banks or NCUA for credit unions. Some of the downsides to a money market account is that you’ll many times need a higher initial deposit and minimum monthly balance. Many banks also limit the amount of times per month you can withdraw your money.

As long as you open a money market account with an FDIC-member bank, your money is insured up to $250,000, per depositor within the same institution. If you have multiple accounts within the same bank, all deposits at the bank are covered up to $250,000 in total. However, if you have accounts opened at different banks, each money market account is insured up to $250,000.

Yes, you can typically write checks from a money market account. However, your financial institution may limit how many checks you can write from your account.

Money market accounts often have a limit to the number of transactions you can make. Under Regulation D, there is a limit of six withdrawals per month or statement cycle.

Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.

This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.

Note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed or may no longer be available.

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Money market accounts: What are they and how do they work?