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The Difference Between Savings Accounts and Money Market Accounts

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Savings accounts and money market accounts are different from each other practically in name only. From a saver’s perspective, there is no difference between these types of accounts. There are many misconceptions about the supposed differences between savings accounts and money market accounts, and if you’ve ever tried to learn about these differences online, even from reading major banking industry websites, you may have received a great deal of misinformation.

I am not infallible; if you believe any of the information included below to be incorrect, let me know.

Withdrawal limits

Whether you open a savings account or a money market account at a bank in the United States, the bank applies your cash to their books as an asset and records a liability in the form of your deposit. The government considers both savings accounts and money market accounts as deposit accounts, not transaction accounts. Savings and money market accounts are not meant for frequent transactions. They are both limited by Regulation D, a Federal Reserve Board regulation that indicates that customers may make only six pre-authorized withdrawals from deposit accounts. ATM and teller withdrawals do not count against this limit, but debit card transactions, checks, and online transfers do. You may have read in various places online that only money market accounts are limited to six withdrawals, or you may have read that only savings accounts have this limitation. The limitation applies to all deposit accounts.

Interest rates

Money market accounts may offer higher interest rates, but not necessarily. This list of high-yield savings interest rates includes money market accounts and savings accounts, and the rates across banks don’t prove the hypothesis that money market accounts have higher interest rates in general. When the same institution offers money market accounts and savings accounts as separate products, the money market account often has a higher interest rate. Even this isn’t consistent from bank to bank. For example, some banks offer a “high-yield savings account” as well as a traditional savings account, and this more impressive-sounding product might provide a higher interest rate at that institution than all other products.

Fees

Banks may assess higher fees and minimum deposit amounts for money market accounts. Because customers perceive money market accounts as more sophisticated than savings accounts, banks often limit customers to a select audience by requiring a higher initial deposit amount, particularly when the benefit of choosing this type of account includes a higher interest rate. Furthermore, the bank may charge a monthly or annual fee for the privilege of owning this type of account. While fees and high minimum deposits are common, many banks offer money market accounts for free. Shop around and read the fine print before you commit.

Checks

Banks often offer check-writing privileges for money market accounts. Some do and some don’t. Money market accounts are deposit accounts, which means customers may make only six withdrawals per month as described above even if the bank provides a checkbook. Banks differ in how they penalize customers who exceed six withdrawals per month. In most cases, there is a fee for each withdrawal over the limit. Some banks, like ING Direct, threaten to close your account if you exceed the limit. While banks offer checks for money market accounts, some could, in theory, offer checks for savings accounts if they desired. Most do not.

You don’t even need an official document from the bank (or a mail-order check designer) to draw a check on an account — any piece of paper with your account number, your bank’s name and routing number, the amount, the name of recipient, and your signature will do. You may not even need to include your account number and bank’s routing number in some cases. It might be difficult to find someone to accept a check written with a felt-tip pen on a cocktail napkin without a hassle, but courts have ruled in the past that a hand-written document intended to function as a check is considered a legal form of payment. Thanks to the Check 21 Act, paper checks are even less a part of the payment process than they were throughout the twentieth century.

FDIC insurance

Money market accounts and savings accounts are FDIC insured. FDIC insurance doesn’t come automatically, but it is available for all types of deposit accounts held at banks located within the United States. This includes savings accounts and money market accounts. More misinformation online states that money market accounts are riskier and could “break the buck” — drop in value. This is true for money market funds or money market mutual funds, not money market accounts or money market deposit accounts. Money market accounts can be insured by the FDIC just like savings accounts and certificates of deposit. Always check the bank’s website to confirm that the bank is covered by FDIC, and if you are unsure, search for the bank using FDIC’s own Bank Find tool.

If the institution offering savings accounts or money market accounts is a credit union rather than a bank, the insurance comes from the National Credit Union Administration (NCUA). This coverage is effectively the same as FDIC insurance.

Money market funds: not savings accounts and not money market accounts

Money market funds — some institutions go so far as to confusingly call these “money market fund accounts” — are not FDIC or NCUA insured. The money market fund product is often offered by both banks and brokerages. Banks use the customers’ money to invest in low-risk securities, like government or municipal bonds with short maturities. This differs from both savings accounts and money market accounts, with which banks use deposits garnered to lend to other customers. With money market funds, the bank hopes to earn more from the bonds than it pays out to investors. A money market fund is an investment vehicle, not a form of savings, though it is almost as safe as an insured deposit account. There was concern a few years ago during the economic crisis that money market funds would break the buck, but for the most part, investors were safe even during the worst financial crisis of the past few generations.

Investors in money market funds are subject to a management expense ratio and possibly fees that reduce the net return.

The differences between savings accounts and money market accounts are negligible, and most are due to differences created by banks, not inherent in the products overall. Regardless of the name a bank gives its savings products, read the terms of conditions to determine how you may use the account, understand any fees they may charge you, and be aware of the penalties for not abiding by the terms.

Photo: frankh
Federal Reserve, Straight Dope,

Updated August 25, 2011 and originally published May 31, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar SteveDH

Great information! The part about Money Market Fund Accounts is particularly important to those who are saving. One thing I would like to stress is that although, as you said, most investors in Money Market Fund Accounts were safe, some of those funds had to be propped-up by their sponsors. Banks like Wachovia and BNY Mellon had to step in to prevent some funds from collapse. Only Lehman’s fund “broke-the-buck” when State Street stopped supporting it on September 15th 2008. (The same day Lehman’s declared bankruptcy)

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avatar shellye ♦107 (Cent)

You’re correct in your assessment that there is little difference between money market accounts and passbook savings accounts. Many credit unions offer money market savings AND money market checking accounts. For example, at my CU, we have two money market accounts. One requires a min. $2500 balance and is limited to six withdrawals per month, with NO POS debit card access. You can access the money via ATM or at the teller window. There is also a fee charged when the balance falls below the minimum. The other MM account requires a min. $25,000 balance, yet has unlimited check writing privileges, and unlimited ATM withdrawals per month (but no POS debit card access). The interest rate is a little higher on the second account, of course, because there is a higher minimum balance, but it’s still nowhere near what you could earn with a high-yield savings or checking account.

My point is this: passbook savings accounts function the same and are regulated pretty much the same at all banks and credit unions. MM accounts seem to have many more variables, so if someone is looking to park some money in one, he or she would be well-served to research among several financial institutions to make sure they get the account that’s best for them.

Great post!

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avatar Steve Dupree

It seems that there is some room for interpretation of Regulation D. Either that or my bank just has a bug in their software. They don’t count scheduled transfers against the limit of 6. When I am ok waiting an extra day, I create a scheduled transfer for the next day. I don’t transfer out of my money market account very often (I work out of my checking account, even though it doesn’t earn interest) so I don’t think i’ve ever exceeded 4 transfers in a single month, in the 12 years I’ve been at my bank.

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avatar Ceecee ♦53 (Newbie)

I didn’t realize that savings accounts had the six w/d limit for online transactions. Thanks for the info.

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avatar skylog ♦368 (Nickel)

i was shocked when i originally found this out as well. there seemed to be very little mention of it anywhere.

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avatar rewards ♦31 (Newbie)

“ATM and teller withdrawals do not count against this limit”

Any reasoning for this clause? It would seem that ATM withdrawals should count against the six transaction limit…

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avatar wylerassociate ♦162 (Cent)

this is a very good post, thanks flexo.

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avatar Harm

Money Market accounts USED to be much higher yielding than savings accounts….
Savings accounts, with their paltry 4% yield, were for suckers only…rotfl.
(This WAS in the 80s and 90s)
hahahahahahahahaha….whew…..
but times changed, and they will again, I’m sure.

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avatar DonnaFreedman ♦90 (Newbie)

I didn’t know about the six-withdrawal limit, either. Thank you.
Of course, I’m trying like hell to leave the money IN the bank anyway.

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avatar qixx ♦1,895 (Half-Dollar)

You have convinced me yet again to stick with my ING account. Good to know about the withdrawal limit but i don’t see myself hitting that any time soon.

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avatar Lucille Budnick

At ing bank(cap 1 360) there mm is compounded monthly and Ally is compounded daily.

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