While money market accounts have several appealing features, they also have drawbacks. Here are a few you should be aware of if you’re considering one.
Withdrawal and transfer restrictions
The Federal Reserve places limits on withdrawal and transfer activities for savings accounts and money market accounts. The Fed generally considers these account types to be vehicles for savings, and actively tries to discourage too many withdrawals.
Regulation D is a rule prohibiting account holders from making more than six withdrawals and/or outgoing transfers per month. Any money market account holder who exceeds that limit is subject to a penalty fee from their bank or other financial institution.
Only certain types of transactions are subject to restriction under Regulation D, including:
- Electronic transfers
- Wire transfers
- Automated Clearing House (ACH) transfers
- Debit card transfers
- Check transfers
- Automatic or preauthorized transfers, like bill pay
Transactions that aren’t subject to Regulation D include:
- ATM withdrawals
- ATM transfers
- In-person transactions at a bank branch
Money market accounts tend to impose more demands on their holders than checking or savings accounts, particularly in regard to opening and ongoing balances. This might seem like an unfair burden at first glance, but it’s actually quite reasonable.
Since the money market account pays you more interest than checking and savings accounts, those interest payments become meaningful only at higher dollar levels. On the banks’ side, higher balance requirements attract and keep a sizable amount of funds for them to use for their short-term investments. On the customer’s side, they maintain a certain level of said meaningful interest payments.
These are two of the more prevalent requirements in money market account funding:
Money market accounts often have a higher bar to clear with the account’s funding balance than savings or checking accounts. It’s not uncommon for a bank to require a four- or even five-figure opening deposit to claim its advertised interest rate.
For example, a money market account may offer a 1.60% interest rate, but the account holder might need at least $10,000 to earn the high rate. If the account is opened with less than that, the interest rate offered for the same account could be much lower. It’s worth noting that some companies allow account holders to catch up. Once the account funds rise to the minimum balance threshold, the higher rate kicks in. In other cases, if you don’t have enough cash to meet the minimum balance requirement, you can’t open the account.
The opening deposit requirement can be quite high in certain corners of this market. Generally speaking, the higher the interest paid, the higher the required minimum opening deposit. This isn’t to say that low- or no-opening deposit minimum money market accounts don’t exist. But it’s more common for there to be a baseline.
Minimum ongoing balance
Most money market accounts have an ongoing balance minimum as well. This is often tracked daily. It can be a standalone requirement without a minimum opening deposit, or it could be in addition to that deposit. Every institution has its own penalties if you fall below the required minimum balance.
Generally, as with the opening deposit, the higher the ongoing balance required, the more interest you’ll earn on your savings.