With solid interest earnings and relatively easy access, money market accounts are a happy medium for many. But how safe are these accounts, and can you lose money in a money market account? What is a money market account? A money market account (MMA) is a type of bank account offered by banks and credit unions. These accounts typically pay a higher interest rate than checking or savings accounts but may come with additional drawbacks. For example, MMAs may have higher fees than checking and savings accounts offered by the same bank or credit union, or they may require minimum deposits. MMAs may also have more restrictions on withdrawals than other bank accounts. Make sure you don’t confuse money market accounts with money market funds. They have a similar name, but money market funds are investments rather than bank accounts. As investments, money market funds don’t qualify for insurance from the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Association (NCUA). Money market funds do, however, qualify for Securities Investors Protection Corporation (SIPC) insurance that applies if the brokerage firm that holds the fund fails. The risks of money market accounts MMAs are considered very low risk in general, especially if the depositor’s total balance at the bank or credit union is below the applicable FDIC or NCUA limit. FDIC or NCUA standard insurance covers up to $250,000 per depositor per ownership category at each financial institution. This insurance guarantees that if the bank fails, you still get back your full balance, including principal and interest, up to $250,000. If you have multiple accounts at a bank or credit union, the $250,000 limit is generally applied across all eligible accounts per ownership type. Let’s say you had a $70,000 savings account and a $200,000 money market account, both individually owned. Of your $270,000 total, only $250,000 would be insured, with the excess $20,000 potentially subject to loss if the bank failed. For joint accounts, the coverage potentially doubles to $500,000. You can use this tool from the FDIC to estimate coverage for bank accounts. For credit union accounts, you can use this tool from the NCUA. Ways to lose money in a money market account While MMAs are generally considered very low risk, you can lose money in these accounts under some circumstances. One way to lose money in a money market account is to incur more fees than the account earns in interest income. For example, if the bank charges fees for not maintaining a minimum balance or for exceeding withdrawal limits, and you often fail to meet the minimum balance or exceed withdrawal limits. The other way to lose money in an MMA is if the bank or credit union fails while you have a balance in excess of the amounts insured by the FDIC or NCUA. That’s generally up to $250,000 for each depositor across all qualified accounts per ownership type. Interest rates and their effect on money market accounts Money market accounts typically pay higher interest rates than savings or checking accounts, but this can vary dramatically between financial institutions. The top end of MMA interest rates are generally similar to rates on other low-risk investments such as high-yield savings accounts, certificates of deposit (CDs), and Treasury bonds. Rates for these accounts are closely aligned with the federal funds rate, which is the target interest rate set by the Federal Reserve Board. The rate on your MMA may rise and fall along with the Fed’s rate, so you shouldn’t expect it to stay constant. How to invest in money market accounts safely The first thing you can do to ensure you’re investing in a money market account as safely as possible is to confirm that the institution is FDIC or NCUA insured. The FDIC’s BankFind Suite and the NCUA’s Credit Union Locator allow you to easily confirm whether the provider you are considering is covered. If your deposits exceed FDIC or NCUA limits, you can mitigate the risk of loss from a bank failure in several ways. One option is spreading accounts across several ownership categories. For example, joint accounts are considered a separate ownership category from single accounts, so opening individual and joint accounts may allow for increased FDIC coverage. Additionally, since the insurance limits are per depositor, per ownership category, and per financial institution, spreading your accounts across more than one bank or credit union can ensure coverage. However, you should consider the consequences of account structures. For example, on a joint account, all of the funds generally pass to the surviving owner when one of the owners dies. Determining the right investment amount for money market accounts Determining the right amount to put in your MMA versus other alternatives is a personal decision that will be based on your specific needs and goals. For example, MMAs are generally considered low risk and are potentially a great place to store an emergency fund or funds needed for short to medium-term goals. MMAs can be a good option if you’re saving for a car, a down payment on a home, a vacation or other goals where the time horizon is not in the distant future and you want certainty that your funds will be available. On the other hand, MMAs are generally not the best option for long-term savings goals, such as retirement. For the 10 years from 2011 to 2021, the average annual return on MMAs was 0.34%. Over that same period, five to 10-year Treasury bonds’ average annual return was 3.29%, and the S&P 500 index posted 15.35% average annual returns. Best practices for choosing money market accounts When choosing the financial institution for your money market account, there are several important factors to consider. These include not only the interest rate on the account but also if there are any balance minimums, balance tiers, maintenance fees or withdrawal limits. Balance minimums can take the form of minimum deposits required to open the account, minimum balances to keep the account open, or both. Balance tiers mean the interest rate will vary based on how much is deposited in the account. For example, an account could pay a 1.00% APY on balances below $5,000 but a 4.50% APY on balances above $5,000. Alternatively, some accounts may only pay the higher interest rate up to a certain limit, such as paying 4.50% APY on up to $100,000 but only paying 1.00% APY above that. Other factors to consider when choosing an MMA include what fees, if any, apply to the account. There may be monthly maintenance fees, low-balance fees, or excess transaction fees. Consider how likely it is you’ll need to pay these fees before deciding which provider is right for you. Frequently asked questions (FAQs) Are money market accounts FDIC insured? Yes, money market accounts are FDIC insured, when held at an FDCI-insured bank or NCUA-insured credit union. The FDIC’s BankFind Suite and the NCUA’s Credit Union Locator allow you to easily confirm whether the institution you’re considering is covered. What are the investment limits of MMAs? MMAs typically do not have account maximums. However, if your balance exceeds the relevant FDIC or NCUA deposit insurance limits, you would risk losing funds in excess of those limits. Additionally, some MMAs have different balance tiers where the best interest rate may only be available up to a certain balance or only available on deposits over a certain amount. Can fees deplete a money market account? Yes, fees can potentially deplete a money market account. Fees in MMAs can take multiple forms, such as monthly maintenance fees, minimum balance fees or fees for exceeding transaction limits. In most situations, the fees are unlikely to exceed the interest earned within the account unless you consistently fail to meet balance minimums or transfer limits. How quickly can I access funds in an MMA? Since MMAs are depository accounts, like checking accounts or savings accounts, you can typically transfer funds with relative ease. However, MMAs are more likely to restrict the number of transfers per month or per statement cycle, so carefully review the terms of your specific account. 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