Interesting Facts About Checking, Savings, and Money Market Accounts

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A reader asked me if there was a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account. A bit of online searching and the venerable Wikipedia yielded the answer, plus some interesting facts about savings accounts.

First of all, why do savings account usually have higher interest rates than checking accounts? I think most of us know that banks make money by using our cash deposits and lending it out to others via mortgages, personal loans, or credit cards. However, we also expect that if we do want to withdraw our money, it will be there. To achieve this, each country sets its own reserve requirements, essentially how much cash the bank must physically keep in a vault somewhere to meet expected withdrawal demands.

As of 2006, the required reserve ratio in the United States was 10% on transaction deposits (checking accounts), and zero on time deposits (savings accounts). Due to fractional-reserve banking, having no reserve requirement allows the banks to lend out much more than their actual deposits.

Added: A quick explanation… At a reserve ratio of 10%, let’s say I put in $100. That means the bank can lend out $90. If whoever borrows that $90 put it in a bank, then the new bank can lend out 90% of that, or $81. This could repeat forever, leading to banks lending out 100+90+81+… = $1,000 for each $100 in deposits. This is just for a checking account. For a savings account, with zero required reserves, a bank could theoretically lend out an infinite amount of money (100+100+100+…). Aren’t you glad your money is insured now? 😉

The main difference between checking and savings accounts are their transaction limitations, as outlined by Regulation D. You can only transfer funds out of your savings account up to six times per month by any pre-authorized method like online or telephone transfers, even to a checking account within the same bank. A max of three of these can be via check or debit card. You can still make unlimited withdrawals in person via a teller or ATM.

This is why it can be difficult to use your online savings account (at over 5% interest) as your sole account for paying bills and such instead of your checking account (often at 0%). Bank often charge fees for breaking this rule, and must close accounts where this transaction limit is repeatedly exceeded.

Back to the initial question – Is there a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account? From what I could find, no. They are both time deposit accounts, just with different naming conventions. Traditionally, money market accounts have a higher minimum balance requirement, and are more likely to offer checkwriting or a debit card (subject to the limits above). These both remain different from money market mutual funds, which are usually not FDIC-insured and are instead a collection of short-term debt instruments.

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  1. nicely put
    I was always wondering the difference all I came up was that Money Market as you said you usually can get checks or an ATM card

  2. This is why WAMU is awesome with 5% savings and FREE CHECKING, u can’t beat it!

  3. You are confusing Savings and Money Market. MM have restrictions but not Savings

  4. Wisely Sunshine says

    Great article! Thank you

  5. _Excellent_ post. One of the first things I did when I started to take my finances seriously was struggle with the whole Money Market Account/ Fund definition. It took me an embarrassingly long time to figure it out!

    One little additional factoid that helps keep things straight is that I think banks created money market accounts to compete with brokerages, who were siphoning away deposits with attractive money fund yields. So the names are intentionally confusing.

  6. I added a quick paragraph summarizing fractional-reserve banking. I hope it made sense…

    Heather, that true – money market “sounds” more exotic.

  7. ITS not IT’S

    IT’S = IT IS

    I like ING’s 4% checking.

  8. Money market funds have some interesting advantages over savings/money market accounts. They don’t have the 6 withdrawals limit, and usually have free checkwriting (over a certain minimum). They can also be state/federal tax free.

  9. What I like to do is to have a credit card and a Savings Account with an awesome rate, and have the credit card paid in full each month, automatically, from the Savings Account. Then, I go to my different utilities and other bills I have to pay, and if it is at all possible, I have those bills paid automatically by the credit card. This way, I pay multiple bills each month, but it only results in one electronic transfer for my Savings Account. There are a few bills which cannot be paid by credit card – I HAVE to write checks for them (what a drag) – so I have the full amount of all of those bills automatically transferred from Savings to Checking once per month, and then the checks go through.

    This system has been foolproof for me so far. And all of my bills (I have oodles) get paid with just two electronic transfers per month.

  10. One quick question – with bank deposits I receive a 1099 INT form at tax time versus with a money market account a 1099 DIV. From what I can tell in TurboTax, the returns on my money market accounts are taxed at a higher rate. Can anyone validate / reject this interpretation?

  11. Mike,
    1099-DIV divident is taxed at the regular icome tax rate. However if the 1099-DIV income is from qualified source then this income is taxed at 15%. but money market dividends are not qualified dividends. Dividends from actual corporations are qualified. 1099-DIV has a separate column for qualified dividends.

  12. fixed, the grammar errors have been. 🙂

    I agree with MM, they should both be taxed at the same rate, your marginal tax rate. That is, unless one of them is a special municipal money market fund that is exempt from federal, state, or local taxes. I can’t see any scenario where the money market fund is taxed higher than the bank interest.

  13. “You are confusing Savings and Money Market. MM have restrictions but not Savings”

    Care to back that up with some proof, Stephen? Check out the Account Disclosure for any savings account.

  14. Jonathan is correct. Savings accounts do have limitations on withdrawals. They are not meant to be heavy transaction accounts.

  15. Nice article. A lot of people I know would find it very useful. Will put it on my blog soon..with credit to you…of Course !

  16. What about non pre-authorized transfers online? I don’t make many between my savings and checking account, but I believe it’s unlimited.

    Seems weird to make the distinction, just don’t pre-authorize…do it when you need to. Is pre-authorized mean every month on a certain day, make a transfer?

  17. Pre-authorized essentially means “non-human-initiated”, or not at a teller or ATM. If you do it online, it is still considered pre-authorized. I know it’s weird, but that’s how it works, and that’s why I wanted to warn people. Just making withdrawals from your own savings to checking accounts via website counts against your six. You can ask your bank for details.

  18. Dont forget that Banks sell mortgages they originate as mortgage backed securities to Fannie Mae, Freddie Mac, or investors such as Goldman Sachs, Citi, … who in turn sell these as pension instruments, etc.

    This way they can hedge their risk, make money off of origination fees, and sell more mortgages without affecting the reserve ratio. They do of course keep a certain percentage of mortgages originated on their “books” they feel are profitable and meet their current risk profile.

  19. Hello,
    I am still a bit confused…
    If I set up a savings account to ladder t-bills; the withdrawls to buy, and the deposit on maturity each count as a transfer. If I do a buy for each week, and the maturiy pays each week that would be 8 transactions in a month thereby allowing the bank to charge fees based on the limit of six transactions per month? SO… it would make more sense to set the ladder up biweekly to avoid charges? Are there banks that waive this 6 transaction fee, or should I look for an account other than a savings?

  20. Good write up. Found this page when I Googled the same question. Discover Bank’s online savings account and MMA both pay 1.00 APY and are insured. The only difference I can tell are the minimum balances and funds from the MMA can be withdrawn from an ATM.

    Would the savings account be more / less susceptible to rate changes than the money market?

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