Tiered Money Market Accounts
Smart shoppers know that there’s extra money to be made by searching for the best bank rates. The problem is, the rate you see advertised isn’t always the rate you get.
Tiered money market accounts are an example of how the rate the bank pays may differ depending on the customer. In the case of tiered money market accounts, whether you get the bank’s best rate – which is likely to be the one they advertise – depends on how much money you deposit in the account.
This article will explain how money market account rate tiers work. It will show a couple different examples of how they affect the amount of interest you earn.
In the end, the goal is for you to know everything you need to account for rate tiers when comparing money market rates. That way, you can get the best rate for your account rather than falling for an attractive money market rate that won’t apply to you.
What is a Money Market Account?
A good place to start is by reviewing the basics. What is a money market account?
A money market account functions much like a savings account. You can access your money at any time, though the number of payments you can make to third parties in any one month may be limited.
Money market accounts offered by FDIC-member banks are covered by federal deposit insurance, up to a maximum of $250,000 per depositor at any one bank. Money market accounts offered by NCUA-member credit unions are similarly insured.
Money market accounts get their name because banks invest the money deposited in them in very short-term income securities. Trading in these securities is known as the money market because they are nearly as liquid as cash. They are also sometimes referred to as cash equivalents.
Money market accounts are frequently confused with money market funds. The names are similar because money market funds are also invest in very short-term income securities.
The key difference is that money market funds are not federally-insured bank accounts. They are mutual funds, and though they are designed to be stable and liquid there is no guarantee that they will always be those things.
So, federal deposit insurance is an important advantage that money market accounts have over money market funds.
As with savings account rates, money market rates are subject to change at any time. Despite this changeability, shopping for the best money market rates is important for two reasons:
- There is a wide difference in the money market rates offered by different banks. Research by MoneyRates.com has routinely found that some money market accounts offer rates well over ten times those of other accounts.
- Even as rates change all the time, many of the same banks routinely stay hear the head of the pack. Choosing one of the banks that has often offered one of the best rates is likely to continue to pay off as rates in general rise and fall.
When you shop for rates, understanding how rate tiers work can become very important.
What is a Tiered Money Market Account?
A tiered money market account is one that offers different rates at different dollar amounts.
As a result, the rate you get depends on the amount of money you have in the account. This might differ from the rate the bank is advertising.
Why do banks do this?
One reason might be to encourage people to deposit more money with the bank. A rate tier can be structured so that larger accounts earn a higher rate.
The desire to attract larger accounts is somewhat understandable because there are certain costs involved in administering any account, large or small. This means larger accounts are often more profitable to a bank.
Another reason a money market account might have tiered rate schedule is so they can advertise an attractive-looking rate without having to pay that rate on much of the money on deposit.
This marketing tactic tends to be especially common when interest rates generally are low, and attractive rates are hard to come by.
How do Money Market Rate Tiers Work?
To understand how rate tiers work, consider two examples:
- In one case, the bank is creating an incentive for customers to deposit more money in their accounts
- In the other case, the bank wants to advertise a flashy rate without actually having to pay it on very much money
Rate tiers as an incentive to deposit more money
Here’s an example of an money market rate tier that works as an incentive to deposit more money:
| Account Balance | Money Market Rate |
|---|---|
| $0 to $10,000 | 0.05% |
| $10,001 to $99,999 | 0.10% |
| $100,000 and up | 0.40% |
An account like this may advertise a 0.40% money market rate, but you would only get that rate if you had over $100,000 in the account.
If you had from $10,001 to $99,999 in the account, your rate would be 0.10%. And, if you had $10,000 or less, you’d only earn a 0.05% rate.
Rate tiers as a marketing gimmick
While the first kind of rate tier means what you see isn’t always what you get, at least in that case the bank is paying the highest rate on the largest amounts of money.
The opposite is when a bank designs its rate tiers so it can use a high rate as a marketing gimmick, without having to pay that rate on very much money.
Such a rate schedule may look like this:
| Account Balance | Money Market Rate |
|---|---|
| Up to $1,000 | 0.50% |
| $1,000 and up | 0.05% |
The idea is to attract customers by advertising a 0.50% money market rate. However, unless you had a fairly small balance, most of your money would end up earning just 0.05%.
Are Rate Tiers the Same as Jumbo Money Market Accounts?
You may be familiar with the concept of jumbo money market accounts, which offer special rates on large deposits. These are similar to rate tiers, but often work in a slightly different way.
Jumbo accounts have traditionally been for deposits of $100,000 or more. They may offer a preferred rate to those customers.
However, jumbo accounts are different from those offered for smaller deposits. In other words, they are separate products with a higher account minimum.
Rate tiers may offer a lower minimum that makes them open to more customers. However, the rate you get would depend on how much you deposit.
How do Money Market Rates Compare with Other Deposit Accounts?
When you compare money market rates, you shouldn’t only compare them with rates for other money market accounts. You should also consider other deposit products, such as savings accounts and certificates of deposit (CDs).
Savings account rates and money market rates are generally very similar. Also, the accounts can generally be used in very similar ways.
So, your decision between a money market account and a savings accounts can be made based on which type of account has the highest rate you can find.
CDs are a little different, because they generally require you to commit your money for a set period of time. However, short-term CDs and money market accounts often have fairly similar rates.
When their rates are similar, the advantage that a money market account has over a CD is that you can access it at any time. This gives you more flexibility than a CD.
On the other hand, having a CD lock in a rate for a set term can work to your advantage in a falling rate environment.
So CDs and money market accounts each have pros and cons. Your choice might come down to how big a rate advantage one has over another.
Note that like money market accounts, savings accounts and CDs might have different rate tiers. So that’s something to watch out for when you’re comparing rates.
How to Find the Best Money Market Rates
As noted, money market rate tiers can complicate the process of comparing rates. Here’s how you can account for that in trying to find the best money market rates.
- Comparing advertised rates is a good first step.
This will allow you to narrow your search to accounts that at least have a chance of giving you a higher rate.
- Decide how important federal deposit insurance is to you.
This will determine whether you should limit your search to accounts at FDIC-insured banks or NCUA-insured credit unions.
- See if you meet the minimum account requirements.
Many accounts will only let you open an account if you deposit at least a specified minimum amount. Don’t waste time looking at accounts that your deposit won’t be big enough to open.
- Check the rate schedule in detail.
Look to see if it’s a tiered rate schedule. If so, see what rate would apply to the amount you intend to deposit. That’s the rate you should use when comparing to other accounts.
- Watch out for fees.
If an account charges a monthly maintenance fee, it effectively subtracts from the interest rate you earn. In fact, in a low interest rate environment, fees may exceed the amount of interest you earn.
Comparing money market rates is smart shopping. However, it’s only effective if you make sure that the rate you see applies to the amount of money you deposit.
