Are Money Market Accounts (MMAs) really as safe as they seem? MMAs are a popular savings tool, offering higher interest rates than standard savings accounts along with limited check-writing and withdrawals. Understanding their safety is important, especially when distinguishing between FDIC-insured MMAs and alternatives like money market mutual funds.
At Remitly, we’ve created this guide to help you understand the safety of MMAs, compare them to other financial products, check whether an account is FDIC-insured, and choose the right account for your needs.
Safety of money market accounts
Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per insured bank, and per ownership category. This means that if your bank becomes insolvent, the FDIC will reimburse your insured deposits.
For example, when Silicon Valley Bank collapsed in March 2023, the Treasury, Federal Reserve, and FDIC responded quickly by reimbursing all depositors, including those with balances above the FDIC limit.
Similarly, if your money market account is held at a credit union, it is insured by the National Credit Union Administration (NCUA) under the same limits and conditions.
How to verify whether an account is FDIC-insured
There are various ways to verify whether a bank or credit union is backed by the FDIC or NCUA:
Check with your bank
Look for the “Member FDIC” logo on your bank’s website, mobile app, or at its physical branches. This indicates that the bank is backed by the FDIC.
Additionally, most banks now offer digital platforms where you can monitor and manage your MMAs from a smartphone or laptop, making it easy to verify insurance information online.
Use the FDIC BankFind tool
You can also visit the FDIC’s BankFind tool online for further verification. Enter your bank’s name to see if it’s officially FDIC-insured and in good standing.
For credit unions: Use the NCUA’s locator
If you’re banking with a credit union instead of a traditional bank, check for NCUA insurance. Use the NCUA’s credit union locator to confirm that your credit union is federally insured.
Risks associated with money market accounts
MMAs are generally considered low-risk and stable, but they aren’t completely risk-free:
- Inflation risk: The interest earned on your MMA might not keep up with inflation, potentially reducing your money’s purchasing power over time.
- Interest rate fluctuations: The interest rates on MMAs can change based on market conditions or adjustments made by your bank.
- Liquidity risk: Although MMAs are relatively liquid, certain restrictions or penalties could apply if you need to access your funds too frequently or exceed transaction limits.
Now that you know the risks associated with money market accounts, we’ll explore how they compare to other financial products.
Money market accounts vs. other financial products
Understanding how money market accounts differ from other financial products like Certificates of Deposit (CDs) and mutual funds can help you choose the right product.
Differences between money market accounts and CDs
MMAs and CDs are both low-risk savings options, but they differ in several key ways:
Access to funds
Money market accounts allow more flexibility for withdrawals and transfers compared to CDs, which typically lock your money in for a fixed term (such as six months or one year). With CDs, you can withdraw your funds before the term ends, but you’ll face early withdrawal penalties. This makes CDs less suitable if you need short-term access to your money.
Interest rates
The interest rates on money market accounts are usually variable and can change based on market conditions, but they are generally higher than those of standard savings accounts. CDs, on the other hand, offer a fixed interest rate for a set period, which provides predictable returns. However, in the short term, especially in environments of rising interest rates, CDs usually offer lower returns than MMAs.
Minimum deposit requirements
Money market accounts may have higher minimum deposit requirements, but they tend to be lower than those of many CDs. CDs generally require a larger initial deposit, which can be ideal for those looking to invest a lump sum for a fixed term.
Differences between money market accounts and mutual funds
Money market accounts and mutual funds serve different purposes and carry varying levels of risk and potential return.
Risk level
Money market accounts are low-risk because of their FDIC insurance security. Unlike MMAs, mutual funds are investment products and are not FDIC-insured.
The value of mutual funds can fluctuate, exposing you to potential loss, which means they’re better suited to investors with a higher risk tolerance.
Liquidity
Money market accounts are liquid, meaning you can access your money relatively quickly, although transaction limits apply.
Mutual funds are also relatively liquid, but accessing your money may take longer, as redemption fees or market conditions may affect how quickly you can sell your shares. This could potentially cause delays during market downturns.
Investment objective
The goal of a money market account is to preserve capital and offer a low-risk way to earn interest, with a focus on short-term savings.
However, mutual funds are designed for growth over a longer period and invest in a mix of assets like stocks, bonds, and other securities through a brokerage or investment firm. This makes them a better option for long-term wealth accumulation.
Returns potential
The returns on money market accounts tend to be modest but stable. In contrast, mutual funds have the potential for higher returns, but the risk of loss is also greater.
The risk-reward ratio of mutual funds is usually higher than that of money market accounts, which can result in greater gains or losses depending on market performance.
Management style
Money market accounts are managed by the bank, with minimal involvement from the account holder. Mutual funds, however, are actively or passively managed by fund managers who decide where to invest your money. This introduces more complexity and a wider range of possible investment strategies that can lead to varying levels of returns based on the fund manager’s decisions.
Pros and cons of money market accounts
Money market accounts offer a mix of benefits and drawbacks, and weighing both can help you make the right choice for your savings goals.
Pros:
- Debit cards: Many MMAs come with a debit card, providing easy access to your funds for everyday purchases or ATM withdrawals without the need for inter-bank transfers.
- Check-writing benefits: Check-writing adds flexibility to your account, allowing you to make payments directly from your MMA without the need to transfer funds elsewhere or wire money online.
- Higher Annual Percentage Yields (APYs): With the higher interest rates, your MMA can earn more over time compared to a traditional savings account, helping you reach your financial goals faster.
Cons:
- Withdrawal limits: MMAs typically limit the number of withdrawals or transfers you can make each month (often six). This can affect your ability to access your money quickly in case of emergency.
- Low interest rates: While MMAs offer higher interest rates, they might not provide the high returns you could get from other investments like stocks and bonds.
- Fees: Some MMAs come with monthly maintenance fees or fees for exceeding withdrawal limits, which could erode the interest you earn.
- Minimum balance requirement: Many MMAs require you to maintain a minimum balance to earn the advertised interest rate or avoid fees, which might not be convenient for everyone.
Choosing the right money market account
Whether you’re comparing interest rates or planning to use your MMA as an emergency fund, choosing the right money market account involves considering how different account features—like yields, balance requirements, and liquidity—align with your financial goals.
Evaluating interest rates and requirements
Understanding how interest rates work and the specific requirements for a money market account can help you find the best option to meet your financial needs.
Interest rates: How they work
Rate tiers: It’s common for most MMAs to offer tiered interest rates where higher balances can earn higher yields.
- APY vs. interest rate: Always check the annual percentage yield, which reflects the total yearly return, including compounding interest. APY gives you a clearer picture of how your investment will accrue over time.
- Market sensitivity: Rates may rise or fall based on central bank policy, such as rate hikes or cuts set by the Federal Reserve. When the Fed raises or lowers interest rates, MMAs usually adjust their rates accordingly, making them sensitive to broader economic conditions.
- Bank promotions: Some banks offer introductory rates that are temporarily higher, often for a limited time. Be sure to read the fine print to understand the structure and terms that apply before opening an account.
Minimum balance and deposit requirements
Money market accounts often come with balance thresholds that affect both your ability to earn and your exposure to fees:
- Minimum opening deposit: Many MMAs require an initial deposit, usually ranging from $500 to $2,500. Premium accounts may require $10,000 or more.
- Ongoing minimum balance: To avoid unnecessary monthly fees or qualify for the best rates, you may need to maintain a certain balance. This may range from $25 to $1,000 or more, depending on the bank account.
- Penalty for falling below minimum: If your balance dips below the required level, you might lose your interest rate tier or incur fees.
Considerations for using money market accounts as an emergency fund
MMAs can be a smart choice for storing your emergency savings fund, but they’re not a one-size-fits-all solution. Before relying on MMAs for life’s unexpected expenses, consider these factors:
Accessibility and liquidity
An emergency fund should be easy to access at a moment’s notice, so be sure the money market account offers:
- Fast transfers or ATM access
- No penalties for urgent withdrawals
Minimum balance requirements
Many MMAs require a minimum balance. If your emergency forces you to draw your balance below that threshold, you might:
- Lose interest earnings
- Incur monthly service charges
This can erode the very savings you’re relying on in an emergency.
Interest earnings
While it’s not advisable to chase returns with your emergency fund, earning interest on idle cash is a nice bonus. Money market accounts typically offer better rates than traditional savings or checking accounts, helping your emergency funds grow without added risk.
Key takeaways
Money market accounts offer a safe, flexible way to grow your savings. With FDIC or NCUA protection, they’re ideal for short-term goals or emergency funds. Be sure to compare rates, check for fees, and confirm insurance before opening an account. With the right choice, your money stays accessible and protected.
FAQs
What happens to money market accounts when your bank becomes insolvent?
If your money market account is held at an FDIC-insured bank and you stay within the $250,000 insurance limit per depositor, your funds are protected. The FDIC will reimburse your insured deposits—usually within a few business days after a bank failure.
Is your money protected in a money market account?
Yes, if your account is held at an FDIC-insured bank or an NCUA-insured credit union. Coverage is up to $250,000 per depositor, per institution. However, some financial institutions may offer supplementary insurance for balances exceeding $250,000, so it’s worth inquiring about if you have a larger deposit.
What is the downside to a money market account?
The main downside of MMAs includes relatively low interest-bearing rates compared to more aggressive investments, like stocks and mutual funds. Many accounts also have withdrawal limits, usually up to six per month, and may come with maintenance fees or minimum balance requirements that can reduce your earnings if not met.
How safe are money market funds?
Money market accounts are considered low-risk but not risk-free. They’re not FDIC-insured and can lose value in rare market disruptions. They’re regulated by the SEC and aim to preserve value, but investors’ losses are still possible.
Can money market accounts be FDIC insured?
Yes. MMAs offered by FIDC-member banks are insured. Always verify with the bank or check for the “Member FDIC” label.
Are Bank of America money markets FDIC insured?
Yes. Bank of America money market accounts are FDIC insured up to $250,000 per depositor, per account ownership category.
Are Fidelity money market accounts insured by FDIC?
No. Fidelity offers money market mutual funds, which are not FDIC insured. They’re investment products and carry a small risk of loss, though they’re designed to be low-risk and preserve capital.
Which is better, money market or CD?
Choosing between a money market account or a certificate of deposit (CD) depends on your financial goals. A money market account is generally better if you want flexibility and easier access to your funds. A CD might be more suitable if you’re willing to lock in your money for a fixed period in exchange for a potentially higher, guaranteed interest rate.