Money Market Fund vs. MMA vs. Savings Account: What’s the Difference? (2024)

Money Market Mutual Funds

Brokerages, investment companies, and financial services firms offer money market funds or mutual funds. The funds pool money from multiple investors and invest in high-quality, short-term securities. While technically investments, money market funds act more like on-demand cash accounts since the money is easily accessible, with better returns than an interest-bearing savings account.

Money market funds may have a minimum initial investment requirement, balance requirements, and transaction fees. These funds charge other associated fees you won't find with a bank account, including an expense ratio, which is a percentage-based fee for management expenses.

The Federal Deposit Insurance Corporation (FDIC) does not insure your money in the account, though the funds are regulated by the Securities and Exchange Commission (SEC). Instead, money market funds are insured by the Securities Investor Protection Corp. (SIPC) for up to $500,000, including $250,000 in cash.

The dividends earned can be taxable or tax-free, depending on how funds invest. On average, money market funds may not yield as high a return as the stock market, but they offer lower risk and lower volatility than stocks.

Remember, though, that just like any other investment, there is no guarantee of returns. Historically, money market funds have been hit by investor panics. The SEC has proposed new rule amendments designed to prevent future crises.

Money Market Accounts (MMAs)

While money market accounts (MMAs) sound similar to money market mutual funds (and people often confuse the two), MMAs are more similar to savings accounts. You may think of money market accounts as a savings account with several checking account benefits—such as check writing and debit cards. You can use debits cards for purchases, transfers, and ATM withdrawals.

MMAs are on-demand, interest-bearing accounts held at a bank or credit union. Deposits of up to $250,000 are FDIC-insured if at a bank and National Credit Union Administration (NCUA)-insured if at a credit union.

An account's interest rates can depend on your account's amount. To earn a higher rate, money market accounts could require a higher minimum deposit or daily balance than a regular savings account.

On average, MMAs provide higher returns than savings accounts. But the best savings account rates can compete with the best MMA rates.

Although the Federal Reserve lifted Regulation D withdrawal restrictions (account holders were only allowed to make up to six monthly withdrawals) in 2020, your bank may still limit your ability to access your account's funds. Ask your financial institution about the rules associated with your money market account.

Savings Accounts

Savings accounts are offered to consumers by banks, credit unions, and other financial institutions. These accounts are generally considered safe, convenient places to store money as you save for future purchases.

Savings accounts hold money you want to transfer or access at any time. Many people use traditional savings accounts to keep their emergency funds.

Savings accounts earn interest, so your money grows over time. On average, savings accounts pay lower interest rates than any other savings vehicle, including money market deposit accounts or mutual funds. But with a bit of research, you can find a higher-yielding savings account that makes sense for your goals and the amount you have already saved.

Like money market deposit accounts, savings accounts are FDIC- or NCUA-insured for up to $250,000. Money market funds are insured by the SIPC for up to $500,000, including $250,000 in cash.

Special Considerations

Money market funds, savings accounts, and money market accounts are considered very low-risk vehicles. But of course, there's the usual tradeoff for safety: the lower the risk, the lower the return potential.

You likely won't earn as much money in money market funds, savings accounts, or money market accounts as in other investments with a higher risk or more volatility. You could make more money in risker investments such as individual stocks or ETFs. However, you could also lose more.

With money market funds, savings accounts, and money market accounts, returns are variable, as interest rates increase or fall in response to a bank's competitive need for deposits and changes in interest rates. If the Fed attempts to stimulate the economy by lowering the federal funds rate, a ripple effect could reverberate throughout the financial markets. This can soon result in lower interest rates and earnings.

If the interest rates on your asset do not keep up with inflation's rate, it can erode the real value of your money.

Which Account Is Right for You?

Investigating each option's details will help you avoid high fees and account minimums, and get the most return for your low-risk savings type.

When You Should Use a Money Market Account

You may opt for a money market account if you have a substantial amount of money—at least four figures' worth—to deposit and can easily maintain such a minimum account balance for a longer period. You'll generally be rewarded with a slightly better yield (although some high-yield savings accounts may offer better returns).

The higher your balance, the greater the interest rate, with most institutions. If you want to write checks on the account or draw from it using a debit card, a money market account also offers these privileges.

Since you earn more interest for higher balances, money market accounts can be a good place to keep funds for a fairly long period of time, such as more than a year.

When You Should Use a Savings Account

A savings account could be a better option if you have a more modest sum (under $1,000) to deposit and don't want to worry about maintaining account minimums or fees.

If you're worried that a money market account's check-writing or constant access might prove an ongoing temptation, a savings account could also work well for you.

Since you can withdraw money from it as easily and it typically doesn't earn much, a savings account is well-suited to short-term goals—a place to park funds until your holiday or a big purchase. Some of the more competitive savings accounts can offer rates higher than the rates you may find with money market accounts.

When You Should Use a Money Market Fund

A money market fund could be best for holding your short-term funds before big expenditures or between investments. If you have large amounts of cash, a less-volatile money market fund can also help diversify your investments beyond one or two banks—particularly if you find recent bank failures unnerving—and more volatile stocks.

This savings vehicle could be a good fit if you're a savvier, more confident investor or working with a financial advisor. You'll want to research money market funds that match your risk tolerance, desire for returns, and tax considerations.

For example, some money market funds are exempt from federal and California tax, with a low expense ratio. This fund might be good if you're a California-based investor. Other money market funds may be taxable but feature higher interest rates or lower expense ratios.

What Are the Alternatives?

Alternatives to money market funds, money market accounts, and savings accounts include:

• Certificates of deposit: CDs are term-based savings accounts that lock up your funds for a set time period in exchange for higher interest rates.
• Treasuries: U.S. Treasury bonds, notes, and bills are guaranteed by the U.S. government, making them a safer investment option. Like CDs, some treasuries lock up your funds for a set amount of time until maturity.
• Bond funds: Baskets of fixed-income securities, usually offered as mutual funds or ETFs. Different funds may have different risk profiles and liquidity. Like money market funds, you'll likely pay fees. Like money market funds, bond funds will charge an expense ratio.
• High-interest checking accounts: As the name indicates, the accounts offer interest rates that rival and sometimes exceed those of money market accounts. However, you may need to meet many requirements to earn the interest, including debit-card transactions.

The Bottom Line

Deciding whether to place your money in a money market fund, a money market deposit account, or a traditional savings account depends on how much money you have to deposit and how you need to access your cash. Other factors to consider include how much risk you want to assume and whether you want a tax-advantaged savings vehicle.

Amid competition between banks and investment firms, you may find that rates vary wildly. A money market fund might have once offered the highest return for your buck. But insured money market and savings accounts may offer competitive rates without the management fees, and with federal insurance for up to $250,000. So, be sure to compare the terms and rates with each.