What is a money market account, and how does it work?

Money market accounts (MMAs) are deposit accounts that share features of savings and checking accounts. Like a savings account, your balance earns interest. However, you may also have the ability to write checks and/or use a debit card for account transactions like you would with a checking account.

Besides having components of savings and checking accounts, money market accounts also have distinct features that set them apart. Here's what to know if you're interested in opening one.

A money market account (MMA) is a type of deposit account that pays interest on your balance and provides limited access to your funds.

Earns interest: Money market accounts often offer competitive interest rates , similar to those offered on high-yield savings accounts and CDs. Currently, the national average rate for a money market account is 0.61%, though many financial institutions offer rates as high as 3%-4% APY.

Tiered rates: MMA rates are often tiered, meaning the highest rates may be reserved for account holders with larger balances, while smaller balances may earn less interest. For instance, a bank might offer 0.10% APY on balances up to $5,000, 0.50% APY on balances of $5,001 to $10,000, and so on. Rates on money market accounts are also variable, meaning they can adjust up or down over time at the bank's discretion.

Easy access to funds: Many MMAs let you write checks or use a debit card, although there may be limits on certain types of withdrawals or transfers.

FDIC/NCUA insured: If your account is at an FDIC-insured bank or an NCUA-insured credit union, your deposits are generally insured up to $250,000 per depositor, per institution.

Higher minimum balance: Some money market accounts require a larger opening deposit or minimum balance than regular savings accounts. Falling below the minimum may result in fees or a lower interest rate.

Money market accounts may be subject to certain fees, such as monthly maintenance fees . These fees vary widely by financial institution, so be sure to compare fees when selecting an account and choose one that comes with low or no fees.

It's also important to pay attention to withdrawal limits . While the Federal Reserve essentially eliminated withdrawal limits in 2020, some banks still impose them. It's common for banks to charge fees for exceeding six withdrawals within a month.

There are a few benefits and drawbacks to putting your savings in a money market account.

Higher interest rates compared to savings accounts : In most cases, money market accounts offer higher interest rates than traditional savings accounts. However, some high-yield savings accounts offer rates comparable to or higher than money market account rates, so it's a good idea to consider both options.

Lower risk compared to other investment options : If you're saving for short-term goals or emergency needs, you don't want your balance to lose value if the market dips. A money market account can be a great alternative to investing since money market accounts don't lose money .

Easy access to funds : While there may be limits on how often you can withdraw your funds, you'll still have fairly easy access to your money via checks and/or a debit card.

Limited withdrawals : If you plan to use your money market account for everyday banking, this may not be the best fit. While the federal government no longer limits monthly withdrawals on money market and savings accounts at six per month, some banks and credit unions still have these limits in place and may charge you a fee for excessive withdrawals.

Lower potential returns compared to riskier investments : If you're looking for a place to put your money for long-term financial needs such as retirement, you'll have a better chance of reaching your savings goals with higher-risk market investments.

Fees can diminish returns : If your money market account charges a monthly fee, it'll eat into your interest earnings.