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Money market accounts are great for short-term investing, and some funds offer you proportionally higher rates of return based on your deposit amount. Cash is typically available “on demand” and the risk in a money market is low. This is because the investments embedded within the money market are made up of very short-term investments like commercial paper, bankers’ acceptances, certificates of deposit, and treasury bills. With all of the advantages, what could possibly go wrong? Answer: plenty.
High Initial Deposit
Money market funds often require higher initial deposits than savings accounts. While savings accounts can typically be opened with $25 to $100, many money markets require anywhere from $250 to $2,500 or more. This larger financial commitment isn’t good if you tend to turn over funds in your savings quickly or you keep most of your money in your checking account. The higher initial deposit also means that you must make a serious financial commitment with your new bank – something you may not want to do right away.
Minimum Balance for Attractive Returns You have to deposit and keep a minimum balance for attractive returns. Some money markets will offer attractive high yields, but only if you keep a balance of $25,000 or more in your account. If your average daily balance falls below the minimum requirement, you lose the high interest payment.
Fees
Most money market funds charge a fee if your balance drops below a certain dollar amount. For example, a bank may impose a $2,000 limit on your account. If your account drops below this dollar amount, the bank will keep your account open, but charge you a fee every month for the low balance. This fee is normally enough to offset any interest paid on the account and then some. All of the sudden, your money market account can go from interest bearing to losing money after fees.
Limited Initial Access and Minimum Withdrawals
Banks don’t like it when you turn over funds in your money market account. To curb this behavior, institutions frequently impose minimum withdrawal sizes and limit the access to your account within the first 30 or 60 days of opening it. This initial limited withdrawal period prevents you from using your money when you might need it. This could be especially annoying if you rely on your savings for emergencies and the bank limits your withdrawals for the first 60 days after opening the account. Additionally, a minimum withdrawal amount may prevent you from getting the exact dollar amount you want – forcing you to take more than you otherwise would take just to satisfy the minimum withdrawal rules. In this sense, the money market fund isn’t acting like a savings anymore. It’s more of a low-yielding investment.
Taxes
You pay income tax on all of the investment earnings you do get from your money market account unless you’ve purchased it as a mutual fund inside of an Individual Retirement Account (IRA). Because money markets are often seen as short-term investments, most people try to use them as a proxy for a regular savings account. However, the clunky nature of withdrawing funds, and limited initial liquidity forces you to use the account as an intermediate-term investment instead.
Alternatives
When a money market won’t work the way you need it to, consider just putting your money into a regular savings account. If you want a longer-term investment, consider a bank CD or an annuity insurance policy. You can also always use a regular checking account if you plan on making frequent deposits and withdrawals.
Jennifer Carrigan wrote this article on behalf of Complex Search, where you can find information on high yield money market rates.