Some salient features of money market accounts
Money Market Account is a type of savings account offered by banks and credit unions. The Money Market Account (MMA) offered by a bank invests in Government and Corporate securities and pays the depositor interest based on current interest rates.
The difference between a savings bank account and Money Market Account is that they usually pay higher interest, have higher minimum balance requirements and allow only up to six withdrawals per month.
Types of Money Market Accounts:
Money Market Account can be classified based on the institution that markets the funds. Funds may be marketed by Banks and Credit Unions or by Financial Investment Companies.
The funds marketed by banks and credit unions, is insured by the Federal Deposit Insurance Corporation (FDIC) which means that even if the bank or credit union goes out of business, your money will still be there. The rate of interest however will be lesser compared to the Financial Investment Companies.
The funds marketed by the financial investment companies are not insured. They usually pay higher interest but have higher minimums. (Up to $25,000) and may allow fever withdrawals each month. Another way of classifying money market accounts is by the type of bonds the funds holds. Some funds specialize in corporate bond while others hold only Municipal bonds. Money Market Funds that buy corporate short term bonds pay higher rates of interest and are not exempted from tax benefits.
The funds that hold municipal bonds pay lesser interest rate compared to corporate bonds, since they are tax exempt. Most investors prefer the municipal bonds.
Money Market Accounts can again be classified into two types;
Money Market Deposit Accounts (MMDA) and Money Market Mutual funds (MMMF)
Both these type of money market account have advantages of easy access to our money, have higher rate of interest than regular savings account, and have cheque- writing and money transfer privileges.
The differences are:
- MMDAs are guaranteed by the Government either by the Federal Deposit Insurance Company (FDIC) for banks or by the National Credit Union Administration (NCUA) for credit unions.
- MMMFs are not insured by FDIC, so there is slight risk involved if their values go down and you may lose on your interest.
- Though the MMFs have higher risk than MMDA, they have higher yield.
Tips to take care of your Money Market Account:
- Keep the average monthly balance above $2,000 to avoid monthly service fees.
- Limit your withdrawals to less than six times per month to reduce debit fees.
How the MMA works:
- Dividends will be compounded on the last day of every month.
- The rate of dividend and annual percent yield changes according to the market and is decided by the board of directors.
- Deposits may be insured up to $100,000 by the FDIC for non-retirement accounts.
- In a month, you can make a total of six withdrawals from your account; three of those may be by cheques. More than six withdrawals incur a fee.
- Minimum balance varies from bank to bank.