Difference Between High-Yield Savings and Money Market Accounts Explained

Choosing where to keep your savings is an important decision, especially when considering accounts that offer interest. Two popular options are high-yield savings accounts and money market accounts, both providing a secure place for funds while earning a return. However, they differ in accessibility, fees, and benefits. Understanding these distinctions helps determine which suits your financial goals.

Interest Calculation

Both high-yield savings and money market accounts use compound interest, but compounding frequency and annual percentage yield (APY) vary by institution. Some banks compound daily, boosting growth, while others do so monthly or quarterly, slowing accumulation.

High-yield savings accounts typically offer higher APYs than traditional savings accounts. Online banks, with lower overhead, tend to provide the most competitive rates. As of 2024, some offer APYs exceeding 4.00%, while traditional banks often lag. These rates fluctuate with the Federal Reserve’s benchmark interest rate.

Money market accounts also offer competitive rates, often tiered by balance. A bank might offer 3.50% APY for balances under $10,000 but increase it to 4.25% for higher amounts. This benefits those with larger deposits, but balances below a certain level may earn less.

Access and Withdrawal Limits

Both accounts have withdrawal limits, but money market accounts generally offer more flexibility.

Regulation D previously capped savings and money market account withdrawals at six per month for certain transactions. Though the Federal Reserve suspended this rule in 2020, many banks still enforce similar limits. Exceeding them may result in fees or account conversion. Some banks allow unlimited ATM or in-person withdrawals, but electronic transfers often remain restricted.

Money market accounts typically include check-writing privileges and debit card access, making them convenient for occasional transactions. However, some banks impose minimum withdrawal amounts or limit the number of checks allowed per month.

Minimum Balances and Fees

Minimum balance requirements vary and influence account suitability.

High-yield savings accounts, especially from online banks, often have no minimum balance, allowing accounts to be opened with as little as $1. Some banks require a minimum deposit for the highest advertised rate.

Money market accounts frequently have higher minimum balance requirements, often between $1,000 and $10,000. Falling below this threshold can trigger monthly fees, typically $5 to $15. Some banks waive fees for direct deposits or multiple accounts with the institution.

Insurance Coverage

Both account types are insured—high-yield savings and money market accounts at banks by the Federal Deposit Insurance Corporation (FDIC) and at credit unions by the National Credit Union Administration (NCUA). Coverage extends up to $250,000 per depositor, per institution, per ownership category.

For larger balances, structuring accounts strategically can increase coverage. A married couple, for example, could each have an individual account insured up to $250,000 while also maintaining a joint account that qualifies for an additional $500,000, bringing total coverage to $1 million at a single institution.

Tax Considerations

Interest earned on both account types is taxable and must be reported on federal tax returns. Banks and credit unions issue a Form 1099-INT if total interest earnings exceed $10, though all interest is technically reportable.

Since these accounts generate ordinary interest income, earnings are taxed at the account holder’s marginal income tax rate, which ranges from 10% to 37%. Unlike tax-advantaged accounts such as Roth IRAs or 529 plans, neither high-yield savings nor money market accounts offer tax deferral or exemptions.

For those in higher tax brackets, taxes can reduce the effective return on savings. Some savers explore tax-efficient alternatives, such as municipal bonds, which may offer interest income exempt from federal and, in some cases, state taxes.