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Money market accounts, or MMAs, are a type of savings account that combines competitive interest rates with easy access to your funds. Higher yields are sometimes associated with more risk, so you may be wondering how safe money market accounts are.
Money market accounts, not to be confused with money market funds, are federally insured. While they’re generally safe, it’s worth understanding how they work and what risks they may pose.
How Does a Money Market Account Work?
Money market accounts work similarly to savings accounts. They allow you to earn interest on your deposits, typically at a higher rate than a traditional savings account. MMAs also have features common to checking accounts, like a debit card and checks. However, they aren’t designed for everyday transactions. Like a savings account, MMAs may limit the number of transactions you can make each month without incurring a fee.
Are Money Market Accounts Safe?
Generally speaking, money market accounts are very safe. At banks, money market account balances are insured by the FDIC, and at credit unions, balances are insured by the NCUA. Both the FDIC and NCUA insure up to $250,000 per depositor, per account ownership category per insured institution. As long as you open a money market account at a federally insured institution, your deposits and earnings are safe up to federal limits.
Are Online Money Market Accounts Safe?
When comparing different money market accounts, you may come across certain accounts offered by online banks. Just like MMAs at traditional banks and credit unions, online money market accounts are safe as long as the institution issuing the account is federally insured.
Is Your Money Stuck for a Set Time in a Money Market Account?
When you put your savings in a money market account, you aren’t making any time-bound commitments. Unlike certificates of deposit (CDs), you can make deposits or withdrawals from your money market account whenever you want. But depending on the financial institution issuing your account, there may be monthly withdrawal limits on your account. Some MMAs only allow for six monthly withdrawals before you’re charged an excess withdrawal fee.
Is There Any Risk in a Money Market Account?
There’s no risk of you losing your deposit with a money market account. While money market accounts are considered low-risk accounts, that doesn’t mean there aren’t small risks to be aware of.
The biggest risk a money market account poses is that your money may lose value over time to inflation. Depending on inflation and the interest rate you earn with your money market account, inflation may outpace your MMA’s earnings. When that’s the case, your money loses spending power over time.
While not exactly risks, the following potential downsides should also play a role in your decision to open a money market account.
- Fees. Money market accounts can come with fees, including monthly maintenance fees, excess withdrawal fees, overdraft fees and more, that can eat into your earnings. Some banks may allow you to waive monthly maintenance fees by meeting certain criteria, but that’s not always the case.
- Variable interest rates. Unlike most CDs, which earn fixed interest, MMA interest rates can change after you’ve opened one. You may open an account with a competitive rate, but there’s no telling how long that rate will last.
- Minimum balance requirements. Money market accounts tend to have higher minimum balance requirements than regular savings accounts. While there are MMAs with no minimum requirements, it’s not uncommon to see accounts with minimums in the thousands.
- Transaction limits. While there are no longer federally imposed withdrawal limits on savings accounts, including MMAs, certain financial institutions still enforce them. Look out for withdrawal limits on your MMA, which may limit you to no more than six free withdrawals each month.
Who Should Get a Money Market Account?
A money market account can be a helpful financial tool for many. If you’re looking for a safe place to store savings, an MMA may be a good fit. Because MMAs act like a hybrid between checking and savings accounts, they work especially well for savings you may need to access on short notice—like an emergency fund. When the need arises, you can access your MMA funds by using your debit card, writing a check or making an online transfer.
Money market accounts may also appeal to those who want to max out their savings without taking on added risk. But keep in mind that many have high minimum balance requirements. If you can’t meet an MMA’s minimum requirements, a high-yield savings account can be a better option.
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Frequently Asked Questions (FAQs)
Can money market accounts lose money?
As long as you open a money market account at an FDIC- or NCUA-insured institution, your balance is insured up to $250,000 per account ownership category. This protects your balance in case of bank failure. But keep in mind, any fees you have to pay—like monthly maintenance or excess transaction fees—will cut into your MMA earnings.
What is the downside of a money market account?
A money market account can be a great place for your savings, but there are a few potential downsides to consider. First, inflation can outpace the earnings on your savings. So even if your balance grows over the years, it could still lose relative value over time. Other downsides to consider include potential fees, variable interest rates, high minimum balance requirements and withdrawal limits.
Are money market accounts and money market funds the same thing?
No, money market accounts and money market funds aren’t the same thing. While money market accounts are federally insured deposit accounts, money market funds, which you find at a brokerage rather than a bank, are a type of investment. Rather than paying an advertised interest rate, money market fund returns depend on how the fund is invested.
