Money Market Accounts: Pros & Cons, Benefits and Risks | Capital One (2024)

FAQs

What are the pros and cons of money market accounts? ›

Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

Some of the benefits of MMAs include higher interest rates, insurance protection, check-writing, and debit card privileges.

Overall, a money market account makes the most sense if you have a large cash balance and want to earn interest while maintaining easy access to your money through checks, transfers and ATM withdrawals.

Money market accounts don't have time limits or terms. You can deposit or withdraw money from the account at any time, though there may be limits on how many withdrawals or transfers you can make in a single statement period.

Savings Accounts

These accounts are generally considered safe, convenient places to store money as you save for future purchases. Savings accounts hold money you want to transfer or access at any time. Many people use traditional savings accounts to keep their emergency funds.

Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.

Some disadvantages are low returns, a loss of purchasing power, and the lack of FDIC insurance. A money market fund can be ideal in some situations and potentially unwise in others. If you're close to or in retirement and need some of your money soon, a money market fund can make sense.

Key takeaways

They may come with the ability to pay bills, write checks and make debit card purchases. Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.

So you can make unlimited ATM withdrawals from your money market account without penalty. Many banks also let you to write a limited number of checks from your money market account. You can't do this with most savings accounts.

Can you transfer money from a money market account? ›

Money market accounts usually allow account holders to make withdrawals and transfers, and may allow debit-card transactions and online bill pay like regular checking accounts. But be aware that there may be limits on how frequently you can make withdrawals or transfers from a money market account.

Your money is not bound for a predetermined duration. Instead, you can withdraw funds when needed, giving you control over your finances. So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed.

How much a $10,000 deposit in a money market account will earn annually depends on the annual percentage yield (APY) offered by your financial institution. If you deposit $10,000 into a money market account with a 5.00% APY, you will earn $513 in interest by the end of the year, assuming daily compounding.

If you insist on holding all your money in money market accounts, no one account should hold more than the FDIC-insured amount of $250,000. It is not uncommon to see families or estates with multiple bank accounts insuring their money as much as possible.

Are there any restrictions or penalties when closing a Money Market Account? There are no restrictions or penalties when closing a Money Market Account. If you close your Money Market Account before dividends are credited at the end of the quarter, you will receive closing dividends.

If the interest rates on money market instruments fail to keep pace with inflation, the real value of the investment can erode over time. This can impact the purchasing power of the investor's funds. Limited Growth Potential: Money market investments may not provide significant opportunities for capital growth.

A money market account may come with limits on the number of monthly withdrawals or transfers. Although the FDIC lifted the six-transaction limit in 2020, some banks and credit unions still enforce the rule and impose a fee for exceeding the limit.

If you plan to deposit more than $10,000 at a bank, remember that the transaction will be reported to the federal government. This enables authorities to track potentially suspicious activity that may indicate money laundering or the financing of terrorist activity.