What is a money market deposit account (MMDA)?

A Money Market Deposit Account (MMDA) is a savings account offered to consumers by banks and credit unions. A simple deposit account generally carries more interest. Despite the similarity in the names of the two entities, MMDAs should not in any way be confused with the money market funds that brokerages offer, as they remain to be investment products with different levels of risk and insurance protection.

Key Features of Money Market Deposit Accounts

Higher Interest Rates: Money Market Deposit Account usually enjoys higher interest rates compared to the conventional saving accounts. This is majorly because the institutions offering these accounts can invest the deposits in short-term high-quality financial instruments, among them treasury bills and commercial papers, with the deposits tending to yield higher returns.

Check-Writing: One of the features that make MMDAs easily identifiable is giving the possessor a limited ability to write checks directly from the account. This feature of being able to write checks, which is normally not available with standard savings accounts, does add a level of convenience.

However, there’s a limit to the number of transactions, including checks, that can be made each month.

Liquidity and Access: Despite the better return, MMDAs offer a high level of liquidity. Generally, an account holder will be able to make a withdrawal or transfer out funds without penalty as long as the withdrawal or transfer made conforms to federal transaction limits.

Minimum Balance Requirement: In most cases, customers will be required to have a certain balance to open an MMDA and get the interest rates being offered. The amount of the required balance varies significantly across financial institutions.

Federal Insurance: MMDAs enjoy federal insurance, just like savings accounts. The funds in MMDAs are, therefore, insured by the Federal Deposit Insurance Corporation (FDIC) up to the legal limit, commonly $250,000 per depositor per institution, in banks, or by the National Credit Union Administration (NCUA) in case of credit unions. How Do Money Market Deposit Accounts Work?

Essentially, MMDAs cater to the requirement of very high-interest liquidity together. Banks mobilize the deposits in these accounts to invest in safe short-term financial instruments. The income from such investments gives them the leeway to offer a better rate of interest to the MMDA holders.

The Federal Regulation , however, provides for some restriction to MMDAs to limit pre-authorized, automatic, or telephone transfers not to exceed six in a month. The transfers that come within this limit include checks, debit card transactions, and those made over the internet. Charges may be made for each exceeding in number of withdrawals made, or the account will be converted to one not restricting transactions.

Who Should Consider a Money Market Deposit Account?

Generally, this class of depositors would be the most appropriate for MMDAs—those who would want to gain more returns over the sums of money they have deposited but would not forfeit the access to the money. Exceeding the savings goals in the regular savings account and looking for a safe option to yield higher interest. Individuals seeking a temporary holding place for funds that are earmarked for upcoming investments or expenses. This would be for savers looking for the convenience of access to their money and the flexibility of having check writing, as compared to a certificate of deposit (CD) or investment account.

Conclusion Money Market Deposit Accounts represent a kind of “best of both worlds” between Savings and Checking, offering savers a higher interest, but one that is not so high to take the bank too long to recover from their withdrawal should they choose to do so. Armed with the knowledge and features, limitations, and potential uses of MMDAs, one would take an informed decision about how best to manage their short-term savings and liquidity needs.