What is a money market account?

“Money market” is basically a blanket term to describe the market in which financial institutions such as banks lend and borrow bonds, Certificates of Deposits, and other types of funds. A money market account is a savings account through which money is traded. If you put money in this kind of account, your money is used for investing in Treasury Bills, Certificates of Deposits, mutual funds, and municipal bonds. The financial institution is supposed to pay you interest based on the current money market rates.

What are the rules regarding a money market account?

These accounts are for savings and investments, not for transactions. Thus, they are subject to savings account regulations. Your amount of withdrawals to third parties is limited. Banks are allowed to impose fees for a variety of reasons. For instance, if you go over your monthly withdrawal limit, you can expect to be charged fees. Sometimes the fees are so high that they negate any potential returns from even the best online banking money market accounts.

What are money market account risks?

While considered to be generally safer than the best rated money market funds, these accounts are not without risk. One of the biggest problems you can face with a money market account is excessive fees. You can expect little return on the investments made with your money. Just because interest-earning savings accounts are FDIC-insured does not mean they are completely risk-free and are the best way to invest money.

There is also the possibility that a bank could go under. Many financial institutions have been under scrutiny for their questionable claims. There have been instances where a financial institution has claimed to have adequate funds when in fact it didn’t. If you are going to invest money in high interest money market accounts, do your research on different banks beforehand. Take everything you are told with a grain of salt.

Where do taxes fit in with a money market account?

Taxes are another consideration. There are tax-free accounts and taxable accounts. If you buy into a taxable fund, any returns you might receive are subject to both state and federal taxes. Even if you do put your money in a safe bank and receive fair returns, you will still have to pay taxes on them. Taxable funds usually involve investments in CDs, government agency securities, US Treasury securities, and housing sector markets.

Tax-free funds, on the other hand, don’t offer as many options. If your money’s in a tax-free account, it’s been used for short-term debt obligations issued by municipal securities. These investments tend to have lower yields, and the returns are even lower than those of taxable accounts.

Why should you be careful with money market accounts?

Because you will be entrusting a bank with your money, hoping that the bank will make smart decisions with it in order to bring you good returns. Although it only happens rarely, there is always the possibility that the bank will fail to repay your money in full.
There is a lot of misrepresentation in the money market. Every bank promises to have the “best money market rate” and that its finances are secure. However, it’s vital that you do appropriate research to find out just where each bank is putting investors’ money. These are very dangerous financial times we’re living in, and many financial institutions are making things worse through misrepresentation and overvaluation. When the coming financial crisis in the U.S. hits, you don't want to have your money market account that is subject to failure.