Federal Regulation D on Money Market Accounts
Original post by Cam Merritt of Demand Media
Federal Reserve Regulation D limits how often you can transfer funds out of a money market account without going to the bank or an ATM. In general, you're limited to six such transfers per month. The regulation is designed to prevent financial institutions from letting their customers use savings accounts like checking accounts, which would allow the institutions to skirt federal rules on how much money they must keep in reserve.
Under Regulation D, you can make no more than six "convenient" transfers or withdrawals from your money market account in any statement period, which is usually one month. The Federal Reserve defines a "convenient" transaction as an automatic or preauthorized electronic transfer or withdrawal conducted by phone, fax or computer. This includes such things as automatic bill payments. No more than three of the six transfers can be by check or debit card drawn directly on the money market account. Under the regulation, withdrawals or transfers in person at a branch of the financial institution or at an ATM don't count toward the limit. Nor do transfer or withdrawal requests initiated by mail. However, banks may impose their own, further restrictions.
Regulation D doesn't specify a penalty for exceeding your limit of six convenient withdrawals or transfers. However, it requires financial institutions to either make excess transfers impossible or impose penalties to discourage customers from exceeding their limit. If you are slapped with a fat fine for making too many withdrawals, your bank might point the finger at the government, but it's the bank that set the fine.
All of this might leave you wondering why the Federal Reserve cares what you do with the money in your money market account. One of the Fed's responsibilities is to regulate the supply of money in the economy, making sure there is enough to promote economic growth but not so much that it triggers inflation. Among its tools is Regulation D. The withdrawal limits discussed earlier are just a small part of Regulation D. The bulk of the regulation deals with the Fed's power to require banks and other deposit institutions to hold onto a certain percentage of customer deposits rather than lend that money out. This is called the "reserve requirement."
When the Fed raises the reserve requirement, that pulls money out of the economy, because banks then have less money available to lend. Lowering the reserve requirement pushes money into the economy, because banks are free to lend a greater percentage of their deposits. In general, banks want their reserve requirements to be as low as possible, because granting loans is how they make their money.
Transaction and Non-Transaction Accounts
Institutions' reserve requirements are based largely on how much money their customers have in "transaction accounts," particularly checking accounts. These accounts give customers immediate, often unlimited access to their money. However, money market accounts and savings accounts are "non-transaction accounts." The Fed expects that these accounts are more or less made up of "parked" money. If your money isn't going to be parked, then the Fed wants it in a transaction account, where it factors into the bank's reserve requirement. And that's why Regulation D imposes strict limits on transfers and withdrawals from money market accounts.
- Federal Reserve: Consumer Compliance Handbook -- Regulations Q and D; June 2011
- Government Printing Office: Code of Federal Regulations -- Regulation D
- Digital Federal Credit Union: Federal Transfer Limits (Regulation D); 2010
About the Author
Cam Merritt has been a professional writer and editor since 1992, specializing in articles about spectator sports, personal finance and law. He has produced content for "USA Today," "The Des Moines Register" and the "Better Homes and Gardens" family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.