What Is the Downside of a Money Market Account?
Uncover the less obvious drawbacks of money market accounts. Gain a balanced perspective on these common savings options.
Money market accounts (MMAs) are often considered a secure place to keep funds, offering a blend of liquidity and interest earnings. They are a type of bank deposit account, similar to savings accounts, and typically come with federal insurance protection, often up to $250,000 per depositor per institution. While these accounts can be suitable for parking cash, it is important to understand their lesser-discussed drawbacks to provide a complete picture for financial planning.
Limited Earning Potential
A primary financial disadvantage of money market accounts is their typically low interest rates, especially when compared to other investment vehicles. While MMAs usually offer better rates than standard checking or savings accounts, they often do not keep pace with inflation. This means the purchasing power of money held in an MMA can diminish over time, resulting in a real loss.
Money market accounts feature variable interest rates, which means the annual percentage yield (APY) is not fixed and can fluctuate with market conditions. This contrasts with instruments like Certificates of Deposit (CDs), where rates are locked in for a specific term, providing predictable returns. Even if an MMA offers a competitive rate initially, there is no guarantee that the rate will remain attractive in the future.
Compared to higher-risk investments such as stocks or mutual funds, money market accounts offer significantly lower returns. They are not designed for substantial wealth accumulation. Individuals seeking to maximize long-term investment growth may find that the modest earnings from an MMA fall short of their financial objectives.
Potential Fees and Account Restrictions
Money market accounts can come with various fees and restrictions that may reduce their overall value. Many financial institutions require a minimum initial deposit to open an MMA, which can range from a nominal amount to several thousand dollars, with $2,500 being a common requirement. Some accounts also impose a minimum balance requirement that must be maintained to avoid monthly maintenance fees.
Monthly maintenance fees can range from $10 to $25 if the account balance falls below the specified threshold. These charges can quickly erode any interest earned, particularly on smaller balances. While some banks offer ways to waive these fees by maintaining a certain balance or setting up direct deposits, careful monitoring is required.
Additionally, money market accounts may incur fees for excessive transactions. If a certain number of withdrawals or transfers are exceeded within a statement cycle, a fee, typically ranging from $3 to $15 per transaction, might be applied. Failure to adhere to minimum balance requirements or repeated excessive transactions can lead to account closure or conversion.
Understanding Liquidity Limitations
While money market accounts generally offer more flexibility than traditional savings accounts, they do come with specific liquidity limitations. Historically, federal Regulation D limited certain types of transfers and withdrawals from savings and money market accounts to six per statement cycle. This regulation was established to differentiate these accounts from transactional checking accounts.
The Federal Reserve suspended the transaction limits of Regulation D in April 2020, in part to provide consumers with greater access to their funds during economic uncertainties. However, many financial institutions have chosen to retain similar internal policies, or impose their own limits on convenient transfers. Individual banks can still restrict the number of outgoing transactions.
Exceeding these bank-imposed limits can lead to penalties, such as excessive withdrawal fees or a forced conversion of the account to a non-interest-bearing checking account. Transactions that typically count towards these limits include online transfers, checks written from the account, and pre-authorized payments. ATM withdrawals and in-person transactions at a branch are generally exempt from these restrictions.