Advantages & Disadvantages of Money Market Accounts

Banks offer money market accounts.

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A money market account, or money market deposit account, is a government-insured bank account that pays relatively high interest rates and provides cash withdrawal privileges. This type of account offers both savings and checking tools at higher yields than regular savings and checking accounts. Money market accounts are offered by banks and credit unions and have several significant advantages and disadvantages.

Advantage 1 -- Higher Rate of Interest

Money market accounts pay higher interest rates than other types of bank accounts, including passbook savings accounts and regular savings accounts, provided they maintain the minimum balance. The interest rate is tiered, compounded and credited monthly so that a money market account accrues more profit as the account balance increases.

Advantage 2 -– Low Risk

The independent Federal Deposit Insurance Corp. insures money market accounts up to the $250,000 limit per account, making them low-risk and safe investments. This makes the account popular with investors as it protects them against loss of deposit.

Advantage 3 -– Easy Access

Account holders can easily access their money market accounts through ATMs, transfers and checks. Banks, however, put a limit on the number of transactions and transfers per month.

Disadvantage 1 -- High Balance Requirement

Financial institutions require account holders to maintain a minimum balance in their money market accounts. Bank of America, for example, requires a minimum balance of $2,500 in all its money market accounts. Commerce Bank’s Premium Money Market Account specifies an average daily balance of $5,000. Accounts that do not maintain this minimum are fined.

Disadvantage 2 -– Limited Number of Withdrawals and Transfers

Most money market accounts allow only a limited number of monthly withdrawals and transfers as per federal banking regulations. For example, the National Alliance Bank permits no more than six withdrawals per statement cycle. Commerce Bank’s Premium Money Market Account allows up to six transfers or withdrawals per month. This poses an inconvenience to a customer who needs to make an emergency withdrawal that will exceed the number of withdrawals permitted.

Disadvantage 3 -– Interest Rate Fluctuation and Other Fees

A variable and fluctuating interest rate applies on a money market account. The interest rate depends on changes in the overall market interest rates. Banks and other depository institutions offering money market accounts establish fees for account maintenance, transactions and other financial services -- which reduce the value of the account.