Money market accounts vs. money market funds

Money market accounts and money market funds have plenty in common since they’re both low-risk ways to save money. But they also have some important differences.

A money market account is a type of savings account with some features similar to a checking account, while a money market fund is a type of mutual fund.

We cover the differences between the two, as well as what you need to know about each.

What are money market accounts?

A money market account is a type of savings account with features similar to a checking account. You’ll earn interest like you would with a savings account. You may also be able to write checks and use an ATM or debit card, like a checking account. Money market accounts often limit the number and size of transactions you can make.

On average, money market accounts have a better interest return than other common deposit accounts. The national average interest rate for money market accounts was 0.67% as of March 2024, according to the Federal Deposit Insurance Corp. (FDIC). It was 0.47% for savings accounts and 0.07% for interest checking accounts.

Money market accounts offered by federally insured banks and credit unions are insured by the FDIC or National Credit Union Administration (NCUA), up to $250,000 per bank or credit union, per depositor.

Check with the FDIC’s BankFind tool or NCUA’s Credit Union Locator to see if an institution is insured.

What are money market funds?

Money market funds are a form of mutual fund and are bought through brokers. Money market funds invest in short-term, low-risk securities, such as U.S. Treasury notes or municipal bonds. The assets vary from fund to fund, so you can pick the best type for your needs. For example, some money market funds are tax-exempt because of their investments.

Federal rules require money market funds to invest only in short-term assets and maintain certain liquidity levels.

Money market funds do not have federal insurance through the FDIC or NCUA.

Differences between money market accounts and money market funds

While money market accounts are federally insured (as long as the institution is federally insured), money market funds do not have that safety.

“The critical difference is the lack of insurance with money market funds,” said Laura Lynch, a certified financial planner. She said that the federal guarantee that protects their money regardless of market gyrations is paramount for some consumers.

Pros and cons of money market accounts

Pros

Strong rates: Money market accounts usually have higher interest rates than savings or checking accounts, but often have lower returns than money market funds.

Easy access: Most money market accounts allow you to write checks and/or use an ATM card, allowing quick access to your money when needed.

Safety: As long as you bank with a federally insured financial institution, your account is insured up to $250,000.

Cons

Fees: Money market accounts often have fees for monthly maintenance, ATM withdrawals, transfers, exceeding transaction limits or not carrying the minimum required balance.

Limitations: Many banks and credit unions have transaction limits on money market accounts, meaning a money market account can’t replace a checking account for regular banking.

Minimums: Some money market accounts have minimum opening deposits or minimum balances required to avoid fees or earn the highest rate.

Pros and cons of money market funds

Pros

Interest rates: Money market funds usually generate higher returns than all types of savings accounts, including money market accounts.

Tax savings: You may be able to avoid federal taxes by investing in certain funds.

Generally safe investments: Despite no federal insurance, money market funds are considered low-risk investments.

Cons

Availability: Money market funds usually don’t come with debit cards or checks.

Fees: Money market funds charge management fees, usually a small percentage of your funds.

Lack of insurance: While money market funds are considered safe, there is no federal insurance on the money you have in them.

How to choose between a money market account and a money market fund

If the guarantee that you cannot lose your money is your overriding concern, a money market account is the safer bet because it’s not a bet at all. The FDIC (or NCUA) insures your deposit in the money market account with federally insured institutions up to $250,000.

Meanwhile, returns can be a little higher for money market funds precisely because they are a little bit riskier, though they are still conservative picks.

You’ll also want to consider how often and quickly you need to access your funds. Money market accounts usually come with a debit card, checks or both for quick withdrawals. Money market funds usually don’t come with these features and you’ll also have to sell them like any mutual fund if you want to get your money out.

Liquidity in money market accounts and funds

Both money market accounts and funds are useful for managing savings for short- and medium-term goals.

“If you know something is coming down the pike in under five years like buying a car, or if you have kids starting college, you’d never put those funds at risk in an equity or even a bond fund,” said John Madison, a CPA and financial counselor. “A money market gives you a great option to earn some interest and as far as financial instruments go, they’re as risk-free as they can be, while maintaining a high level of liquidity.”

Liquidity is also why money market accounts and funds can be a good pick for household emergency funds, he said.

Taxes and money market accounts and funds

The interest earned in a money market account is taxed as ordinary income each year you receive that income. The gains from a money market fund are also taxed as ordinary income in that same year.

Some money market funds traffic only in local and state bonds, which usually offer tax advantages, so it is possible to capture some sheltered income through money market funds.

For money market accounts, the institution will issue you a 1099-INT that shows the taxable interest. For money market funds, the company will issue you a 1099-DIV that shows your dividends.