Money Market Account Rates

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Money market account rates are slightly higher than what you can get for your cash from a passbook savings account at your local bank, or even from a money market style savings account at your local bank.

However, they are slightly higher than interest rates you can get for certificates of deposit, especially if you're willing to tie your money up for many years.

Taxable Money Market Account Rates are Higher Than Those in Nontaxable Funds

Most money market accounts are taxable. They invest in the short term commercial paper securities of corporations, the United States government agencies or direct Treasury obligations. The interest they pay is taxable income.

However, some money market accounts buy only the short term securities of state and local governments. By law, the interest these types of securities pay is not subject to federal income taxes. Because you get to keep more of the interest these types of accounts pay, they can get by with paying yields that are even lower than that paid by taxable money markets.

Some states have laws making the interest paid by state and local governments in that state free from income taxes in that state. Therefore, there are money market funds that invest only in the short term securities of state and local governments of a particular state (usually one that has high state taxes, such as California and New York). If you live in that state, especially if you have a high income, you can save money by using only a money market that specializes in your state's tax-free investments.

If you do not live in such a state, you should stick with national tax-free money market funds. These can buy up short term municipal and local obligations from anywhere in the United States. Therefore, you do not have to pay federal taxes on this income. You are still subject to the income taxes laws in your particular state (unless you live in a state such as Florida or Nevada that doesn't have state income taxes).

Greater Risk Results in Higher Money Market Account Rates

Money market account rates can also go up if the fund is investing in higher risk securities. For example, buying securities with a longer term maturity date or a lower credit rating. This raises the risk, which raises the reward but also -- increases the risk. That is, there is a higher risk of default, meaning the money fund's value could go down.

Although the federal government moved to protect money market accounts during the financial crisis in September 2008, there's no guarantee they will protect you from a money fund company that is simply mismanaged. So don't get greedy.

Also, beware of any money fund that a brokerage tries to get you to enroll in. You'll pay higher fees and a commission. Stick with mutual fund companies, and contact them directly, either through their website or an 800 number. There is no reason on Earth to pay a broker to open a money market fund account for you.

Be aware that although money market account rates do go up and down on a daily basis, they're very low now on a historical basis, and are likely to remain so, because of the pressure of economic globalization.

Next: Money Market Funds -- how to use these in your personal financial planning.

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