Money market accounts, a special kind of account offered by many banks and other financial institutions, are a sort of hybrid between checking accounts and savings accounts. They offer higher interest rates than savings accounts. Many people put their money into them as a way of increasing their investment income. Since they generate income, however, they can and will be taxed – but not always. Tax-free money market accounts are everywhere. The differences between the two types lie in the details.
A money market account will get you much better interest rates than a plain old savings account, but you will be required to keep a higher daily balance, and make bigger deposits. There are other strings attached to a money market deposit account as well, such as a set number or limit of transactions allowed per month. That means you can only write so many checks. If you go beyond that number of permissible transactions per month, you will end up paying an unpleasantly high penalty fee – ouch! The good news is, though, that banks now offer ATM cards to go with your money market deposit account, so things will be that much more convenient. So, if you have a chunk of cash sitting around that you know you’re not going to touch for a long time, you will be safe with a money market deposit. The same goes for your deposits – since you’ll need to make larger-than-average deposits (usually a set figure) you will need to have income coming in to meet that requirement. In most instances, a money market deposit account will pay the daily, fluctuating interest rate set by the markets.
To determine whether or not your money market account is taxable or nontaxable – a very important distinction, right? – sit down with a qualified financial expert and ask as many questions as you want in order to feel fully knowledgeable about your options, and where your money is going. It’s the only way to feel truly confident about your financial picture.