Higher Rates at Higher Costs: 5 Common Restrictions of Money Market Accounts

Money market accounts can be a great way to earn more on your savings deposits. On average, money market rates are higher than savings account rates. However, these generally higher yields often come with some strings attached--which is fine as long as you understand what those strings are and how to avoid getting tangled up in them.

Money Market Account Advantages

Money market accounts are generally designed for larger, more stable deposits, which gives banks more latitude to invest those deposits. Theoretically, this extra latitude can translate into higher bank rates.

On average, that theory does play out well in practice. According to FDIC figures, as of late May 2010, national average money market rates were 0.30%, versus 0.20% for average savings account rates. Appropriately, the advantage was even greater for jumbo accounts (deposits of $100,000 or more). For jumbo accounts, the differential was even greater: average money market rates were 0.26 points higher than for jumbo savings accounts.

Five Common Restrictions to Money Market Accounts

What kind of strings come attached to those higher money market rates? Terms and restrictions will vary from account to account, but the following are five common types of stipulations you may find with money market accounts:

1. Tiered interest rates. Naturally, a bank will want to advertise its highest money market rates, but sometimes those are only available on the highest level of balances. The differences can be extreme--in one example, the rate for balances less than $10,000 was 0.15%, while the rate for balances above above $100,000 was 1.60%.
2. Minimum balance. There may be a minimum to start the account, and you might be required to maintain a certain minimum balance to avoid fees and/or to be eligible for money market rates.
3. Ceiling on higher interest rates. This is the flip side of a tiered interest rate system. In this case, a higher rate will be paid only up to a certain balance amount. It means that a bank wants to offer a high rate to attract your business, but they don't want to give away the store by paying that amount on huge balances.
4. Limited number of withdrawals. Because money market accounts are designed for stable balances, they may limit the number of withdrawals you can make in any one statement cycle--typically to six. This shouldn't be too bad as long as you aren't trying to use the account as a checking account. Exceeding the limit is likely to incur a per-withdrawal fee.
5. Length of commitment. This is not a stated restriction, but it can be a limitation of some offers. Since money market accounts do not guarantee rates for any length of time, you have to watch out for banks that offer an eye-catching rate for a short period to attract attention but then revert to a much lower rate. Following money market rates on MoneyRates.com can help you get a sense for which banks consistently offer the highest rates.

There are two ways of looking at these restrictions. First, consider your banking habits. It may be that your balance size and transaction patterns would not run afoul of an account's limits anyway, so you can just focus on comparing money market rates. (For more details on factors to consider when opening a new money market account, read Finding Your Perfect Money Market Account.) Second, if you find your habits would bump up against one or more of an account's restrictions, you have to decide if the rate is attractive enough relative to other bank rates for you to change your banking habits--for example, making fewer withdrawals.

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