Money Market Accounts: 5 Common Restrictions
A money market account can really help you earn more on your savings deposits. On average, money market rates are higher than savings account rates. However, these higher yields often come with some strings attached — restrictions that encourage customers to park their funds for longer periods. Key to finding the best money market accounts is understanding these restrictions and how to use them to your advantage.
What Is a Money Market Account?
A money market account is an interest-bearing account designed to help you build wealth in virtually the safest manner possible. In addition to higher yields, these accounts may also offer limited check-writing ability or debit-card transactions — in a sense, combining the benefits of a checking account and savings account.
How Do Money Market Accounts Work?
Money market accounts are generally meant for larger, more stable deposits, which gives banks greater latitude to invest those deposits (typically in certificates of deposit, government securities, and even commercial paper).
Theoretically, this extra latitude can translate into higher bank rates compared to regular savings accounts. The advantage can be even greater for jumbo money market accounts (deposits of $100,000 or more).
Expert Tip: Money market rates change over time in response to economic shifts and changes at banks. To make shopping for rates easier, MoneyRates runs a regular America’s Best Rates feature that highlights savings and money market accounts that consistently offer the highest rates in their category. If a strong ongoing yield is a top priority for you — and it should be — this may be a good place to start your search.
While a money market account is a highly liquid type of savings vehicle — you can access your funds at virtually any time — you shouldn’t assume that it can take the place of a conventional checking account because of its restrictions.
Money Market Account Restrictions
What kind of limitations come attached to those higher money market rates? Terms and restrictions vary from account to account, but the following are five common types of stipulations you may find with money market accounts:
- Limited number of withdrawals
Because money market accounts fall under Federal Reserve Regulation D, banks may limit the number of withdrawals you can make in any one statement cycle — typically up to six withdrawals per month.Exceeding the limit is likely to incur a per-withdrawal fee. Fees schedules are set by each bank, not by Regulation D, and can become punitive quickly. This shouldn’t be too bad as long as you aren’t trying to use the account as a checking account, but it is wise to shop for the best fee structure as well as the highest money market rates.
- Minimum balance
There may be a minimum to start the account, and you might be required to maintain a certain minimum balance to avoid fees and/or to be eligible for money market rates. - Tiered interest rates
Naturally, a bank will want to advertise its highest money market rates, but sometimes those are only available on the highest balances. The differences can be extreme — in one example, the rate for balances less than $10,000 was 0.15% while the rate for balances above above $100,000 was 1.60%. - Higher interest rate ceiling
This is the flip side of a tiered-interest-rate system. In this case, a higher rate will be paid only up to a certain balance amount. It means that a bank wants to offer a high rate to attract your business, but they don’t want to pay that amount on huge balances. - Length of commitment
This is not a stated restriction, but it can be a limitation of some offers. Since money market accounts do not guarantee rates for any length of time, you have to watch out for banks that offer an eye-catching rate for a short period to attract attention but then revert to a much lower rate. Follow money market rates on MoneyRates.com to help you get a sense for which banks consistently offer the highest rates.
How to Take Advantage of These Restrictions
Despite the restrictions placed on money market accounts, these savings vehicles offer higher yields while ensuring a measure of liquidity for depositors. You can use these restrictions to your advantage if you are willing to shop for the best rates, account features and terms. There are three ways to look at these restrictions:
- Encouraging good saving habits
Limiting withdrawals can help you develop better saving habits, ultimately encouraging you to leave your deposits alone so the balance grows. - Consider your banking habits
It may be that your balance size and transaction patterns would not run afoul of an account’s limits anyway, so you can just focus on comparing bank rates. - Factor in higher money market rates
If you find your habits would bump up against one or more of an account’s restrictions, you have to decide if the rate is attractive enough relative to other bank rates for you to change your banking habits — for example, making fewer withdrawals.
Frequently Asked Questions
Q: If I choose an account today, how do I know that the bank won’t drop its money market rates tomorrow and leave me with less than I could have gotten at another bank?
A: The short answer is, you don’t know. Money market rates are variable and subject to change at any time. If you wanted to lock a rate in for yourself, you’d be looking for the best CD rates and would choose a term that would lock those rates in for as long as possible.
However, there are risks involved with locking in a rate–especially this environment. If you lock in a rate, you’d miss out if rates were to rise. With bank rates currently at or near record lows, betting that rates won’t rise is a bet against history.
Money market rates, on the other hand, are free to rise with the marketplace, but as you point out, there’s also the risk that a bank could unilaterally lower its rates at any time.
Certainly, you don’t want to choose a money market account based primarily on a temporary or “teaser” rate, since that is scheduled to expire. For money market rates that aren’t introductory teaser rates, you can ask about how long that rate has been in place, to get a sense for the bank’s history of changing rates.
Ultimately, though, your strongest protection if a change goes against you is to change banks.
Incidentally, with money market rates, you don’t just have to be concerned about your bank lowering your rate. You have to be concerned with them standing pat when the rest of the market is raising rates. So, even if you don’t see your rate changing, it is a good idea to keep an eye on money market rates from time to time to make sure yours is still competitive.
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