By BankingMyWay Staff
A money market account is an interest-bearing bank account. It has properties of both a checking account and a savings account, but it is primarily savings vehicle. Funds in a money market account earn more interest than in a typical “passbook” savings account because they have more restrictions and requirements.

A money market account is an interest-bearing bank account. It has properties of both a checking account and a savings account, but it is primarily savings vehicle. Funds in a money market account earn more interest than in a typical “passbook” savings account because they have more restrictions and requirements.

The bank uses the funds in a money market account to invest in low-risk, short-term investments like certificates of deposit (CDs) and Treasury bills (T-bills). The bank collects the return on these investments and passes some of that return onto account holders in the form of higher interest rates.

In exchange for offering higher interest rates, money market accounts require a minimum balance and limit the number of transactions per month. Many money market accounts have balance minimums of $5,000 or $10,000, but some are available with limits of $1,000 or less. Only six transactions are permitted each month and only three of those may be check or debit card transactions.

Penalties may be imposed if a depositor withdraws enough funds from a money market account to drop the balance below the minimum. These penalties are often in the form of fees, but some may be a forfeiture of accrued interest. For some accounts, interest may only accrue if the balance is above the minimum.

As bank accounts, money market accounts are FDIC-insured up to $250,000 per depositor per type of account. (FDIC insurance is currently schedule to return to the previous level of $100,000 on January 1, 2010.) Money market accounts are sometimes available from some corporations like General Electric (Stock Quote: GE). These accounts often advertise higher yields, but they do not have the safety of FDIC insurance. If the corporation goes into bankruptcy, depositors lose the money in their money market accounts. In the wake of the economic crisis, these corporate money market accounts are scarce. Money market accounts should not be confused with money market funds, which are mutual funds and do not carry FDIC protection.

Many online banks offer higher yield money market than brick and mortar banks. They can afford to offer better rates because they have such low overhead. For example, Discover Bank offers a money market account with a 2% APY for accounts of $2,500 to $9,999 with rates improving as balances increase. Comparatively, the current national average for money market accounts is 0.57% according to BankingMyWay.com.

Because of their liquidity, money market accounts are often used to hold emergency cash savings. Higher returns can be earned, however, in certificates of deposit (CDs) if the money is not needed immediately. Currently, the average rate for a 6-month CD is 1.21 %, more than twice the current national rate for a money market account.

You can shop money market account rates in your area at BankingMyWay.com by entering you ZIP code. This tool allows you to compare and sort money market account offers by APY and balance minimums.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.