Money market securities are long-term debt instruments with a fixed interest rate, just like bonds. In exchange for a small interest rate, the seller agrees to return the loaned money, and the buyer gets a money market security. To learn more, take a look at these money market account disadvantages.
Read more about advantages of money market account to broaden your knowledge base.All of the information here is only for educational purposes. NerdWallet does not recommend any particular stock, security, or other investment, and it does not offer any advisory or brokerage services.
Top 12 – Money Market Account Disadvantages
With a money market account, you get a good return, there’s no risk, and it’s easy to use. This type of savings account is appealing because it has extra features. Check out these money market account disadvantages to broaden your horizons.
Limited Transfers and Checks
You shouldn’t use a money market account to pay your monthly bills. Bankrate.com customers can only make up to six electronic transfers per month, and only three of those can be done with a debit card or check. Most of the time, there are no limits on how much you can take out in person, by mail, or at an ATM. If you have a lot of regular monthly expenses, you still need a checking account.
Better Rates Elsewhere
The best money market accounts give you a decent chance to make money, but savings products with more space may give you better returns. Because of the time value of money, a traditional CD pays off more than a money market account. A two-year CD could give you a return of 3%. Think about the lower yield when you open an account.
Interest Rates Usually Change
Money market account interest rates are not stable. It changes with the market interest rate. Your returns may not be as stable as they seem because banks, credit unions, and other places that hold these accounts charge fees for maintenance and transactions to make up for changes in the market.
Variable Interest Rate
The lowest amount you need to have in a money market savings account to open it varies from bank to bank. The least you can take out of a bank could be anywhere from $1 to $5,000 or $10,000. When you’re just starting to save, it can be hard to open a money market account because of the minimum deposit required by the bank.
Taxes and Inflation
Interest earned on checking and money market accounts is taxed by the federal government. If the interest rate is lower than the rate of inflation, inflation makes your money worth less.
A writer for Bankrate.com, Don Taylor, says that even though there is a penalty for withdrawing money early from a CD with a higher interest rate, you should still do it. People who have a money market account can choose whether or not to insure their money.
Now, you can open a money market account at places other than banks and credit unions. Both Credit Karma and T-Mobile offer discounts. If you move to one of these options, you may lose your FDIC or NCUA insurance in exchange for a higher APY. Accounts for investments that work like money markets are also not safe. Read the fine print before making a deposit to keep your money safe.
Withdrawal Restrictions
Withdrawals from money market accounts are limited in the same way that savings account withdrawals are. Federal Regulation D said that these accounts could only be taken money out of six times per calendar month. Banks can limit how much you can take out of your money market account until the coronavirus outbreak is over. Overdraft fees is another service they might offer.
Annual Monetary Value Decreases
Inflation in the US was 2.3% in 2019. This number is higher because the cost of food and other goods went up, but the cost of energy went down. If you want your money to grow, you shouldn’t put it in a money market account. The average U.S. APY made accounts worth 2.2% less after a year. Few companies even tried to offer an interest rate that was higher than inflation on an annual basis.
Capital Risk
Even though money market funds seem to be safe, some of them have “broken the buck,” or dropped to less than $1 per share. Even though the risk of money market funds is low, they are not insured by the FDIC like savings accounts and certificates of deposit are. Most of the time, investing in the money market is riskier than other similar options.
Fees
It’s important to think about the fees when opening a bank account. A money market account costs money every month to keep open. Some banks, but not all, will waive the fee if you meet certain conditions, such as having a minimum daily amount or a direct deposit. Costs that go up can cut into the interest your money earns each month.
Inflation Risk
Money market funds could lose money if prices go up. Because of inflation, paper money will be worth less than what it says it is worth in the future. Money market funds add to inflation because they don’t give back much. When inflation is 3% and the return on your money market account is 2%, your ability to buy things goes down. If you invest $100, you won’t be able to buy quite as much with $102 at the end of the year. If account rules aren’t followed, any interest earnings that could have been made could be lost.
Breaking the rules of your money market account could result in the loss of all the interest you’ve earned this year. If a significant amount is withdrawn from your account, you may be required to transition to a standard savings account at a bank or credit union. Some organizations can change so quickly, it’s hard to believe.
Variable Interest Rate
The interest rate on a money market account is based on how much money is in the account. So, you can only get the best rate if you deposit at least $10,000. Money market account rates of interest could go up or down at any time. If the interest rate on the market goes down, banks can follow suit and lower their rates. The rate of interest on a CD is fixed until it matures, but the rate on a money market account changes every day.
Some money market deposit accounts give investors good returns on their money, while others have annual percentage yields (APYs) that are the same as traditional savings accounts. You might need to borrow $5,000 or $10,000 to get a better rate. If you were looking for the highest possible savings rate, the lower interest rate on a money market account might make you not want to use it.
Interest Payment Taxes
Money market account interest is tax-deductible for the current tax year. Your bank can show you proof of how much you paid to get these funds. How much money you make affects how much you owe. Some investors may not care about the small annual gains if they can earn these funds. The government could fine you for not reporting this interest income, regardless of its amount.
Frequently Asked Questions
Do you have to Pay Taxes on a Money Market Account?
Mutual funds that invest in the money market are a good example of an investment with low risk. Whether or not a money market fund’s income is taxed depends on the types of securities it holds.
How Much Interest do Money Market Accounts Pay?
There are many different interest rates for these accounts, depending on the bank and how much money is put in. In the past ten years, the interest rates on these accounts have gone down a lot.
What is the Typical Interest Rate for a Money Market Account?
Money market accounts need to have a higher-than-average interest rate. The average percentage yield per year is 0.2%. Rates of interest might be different from one bank to the next. Some banks offer an annual percentage yield (APY) of 0.50%.
Conclusion
A money market account is not the best way to pay for everyday things. If you have $5,000 in savings and don’t plan to use it soon, you should think about the bad things about a money market account. Taking this route lets you keep more of your own money and still make money. It won’t grow faster because interest rates are low right now. This article will go into money market account disadvantages in detail and provide some examples for your convenience.