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Are Money Market Accounts FDIC Insured?

Money market accounts also called money market deposit accounts or MMAs have been an option since the 1980s wave of banking deregulations and have been thriving ever since. Wondering what is so special about this MMA? Let us dig a bit deeper into it.

What Is a Money Market Account?

Consider the money market account as the best way to deposit your savings. MMA is a type of savings account offered by banks, credit unions, and other financial institutions. One of its biggest benefits is that it offers a higher interest rate than a standard savings account. A money market account can be called a hybrid kind of account as it also operates like a checking account, giving you the possibility to make online bill payments, write checks, and withdraw funds with an ATM card.

Nonetheless, there is a limit of only six transactions a month by federal regulations. These limitations do not include ATM withdrawals. In case you go over that limit, your bank is free to close your account, levy fees, or convert the account to a checking account. Banks will also charge a fee if you don’t maintain your required minimum balance.

With the money from a money market account, banks usually invest in stable, short-term, low-risk securities that are extremely liquid. An example could be certificates of deposit ( CDs), government securities, or commercial paper. Once these investments mature, the bank splits the return with you, which is why you end up getting a higher rate.

As you can see, money market accounts offer a combination of features, this being exactly why they are called hybrid accounts. You can see below how the features build up with other types of accounts:

Are Money Market Accounts FDIC Insured?

The more money you put into your money market account, the more attractive this tool will be as rates are often tiered. With an MMA, you have the chance to earn up to 2% depending on the institution, while with standard savings accounts people earn as little as 0.1 %. Money market accounts are also extremely safe. Money market accounts from a bank are backed by the Federal Deposit Insurance Company (FDIC) for up to $250,000 per account and those from credit unions are backed by the National Credit Union Administration (NCUA).

How To Use The Money Market Accounts

As the part regarding what a money market account is is now covered, it is also important for you to understand how to use one. As long as your necessity of accessing your account does not exceed a few times a month and you can meet the minimum balance required (in case there is one), MMA is the right choice for you. You will be able to keep your money accessible while earning some interest. Are you still in doubt whether you should open an MMA or not? Well you should consider it if you:

  • Want access to your savings in case of emergency
  • Want to make a few debit card transactions a month
  • Tend to keep high amounts of money in your checking account
  • Need the ability to write a few checks each month

In the case of regular expenses, however, money market accounts might not be the best option. MMA’s are not the best place to keep the money for regular expenses because there are limits on how many transactions you can make a month. But these accounts are beyond useful for the money you will need in the near future. Therefore, money market accounts are the best fit for infrequent expenses, like tax payments, college tuition, and vacations. They are also perfect for an emergency fund. If you feel the need for a separate account from your regular spendings account so that you will not be tempted to use it, MMA’s are the best option to be considered.

You want to find a money market account with the best interest rates possible and no monthly fees. You may need to meet a minimum deposit amount. Additionally, look for perks like remote check deposits, online bill pay, and 24/7 account access. One of the options is TIAA Bank Money Market Account with a 0.40% APY, which is solid. You will need a minimum of $500 to open an account.

What Is An FDIC Insurance?

Federal Deposit Insurance Corporation is an independent agency of the U.S. government. It protects the money that had been placed in a deposit account with a bank or any other financial institution. In case of any event causing the financial institution you entrusted to fail, you and your money are protected by FDIC.

As it was mentioned above, the money market account is insured by the Federal Deposit Insurance Corporation up to the legal limit of  $250,000. The limit is applied on a per-depositor, per-bank basis, meaning that if your total account balance at a certain bank reaches higher than this limit, only the first $250,000 will be FDIC insured. However, it does not cover fraud or identity theft.

If your financial institution happened to fail, the Federal Deposit Insurance Corporation will compensate for the loss within a few days. They can do it in several ways, one of them being the scenario in which FDIC will open a new account for you at another insured bank with the same insured amount that you lost. Another way FDIC could choose is to send you a check for the insured balance you had in your account at the failed bank.

Take into account that credit unions are not insured by the Federal Deposit Insurance Corporation. They are insured by the  National Credit Union Administration (NCUA) instead. The rules are fundamentally the same, though: The NCUA’s National Credit Union Share Insurance Fund insures up to $250,000 of your total deposits at a given bank.

Money Market Accounts & Money Market Funds

These two terms sound extremely alike but one should not be confused by this and perceive them as the same thing. As we already clarified the meaning and importance of money market accounts, let’s have a closer look at what a money market fund is.

A money market fund is a mutual fund rather than a deposit account. It allows you to invest in short-term debt securities, including US treasury bills. So while offering the same liquidity and low risk a money market account offers, it is at the same time an investment product rather than a deposit one. Hence, money market funds can not be insured by FDIC. As an investment vehicle, a money market fund allows you to earn interest on cash reserves within a portfolio—the stray money left over from transactions, or cash held until it can be invested in other instruments.

Investors buy and sell fund shares or units instead of depositing money into an account. Compared to having an MMA, you are not able to write a check or make a withdrawal from your account this easily. You are required to put in a request to redeem your shares. Fund companies must make a payout within seven days of the redemption request. So a money market account is a hybrid between a checking and a savings account while a money market fund is a type of mutual fund.

Is MMA Safer Than MMF?

The money market fund invests the capital in relatively safe vehicles that mature in a short period of time—usually within 13 months. You are guaranteed a return as the risk is minimized by investing in low-risk assets for a short period of time. Higher-risk money market funds may invest in commercial paper, which is corporate debt or foreign currency CDs. These holdings can lose value in volatile market conditions or if interest rates drop, but they can produce more income, too. Unlike, money market accounts, money market funds are not insured by the Federal Deposit Insurance Corporation.  Money market accounts are a generally safe investment. Besides being insured by FDIC, money market accounts come with low risk and are highly liquid.

Let’s Sum Up!

If you have more than $250,000 in cash, don’t forget that the excess amount won’t be insured if it’s all at one bank. So to get the most coverage, consider opening a savings account or other deposit account at another FDIC-insured bank. Nowadays, most banks should be FDIC-insured. Still, it’s important to double-check what kind of securities and protections your bank has in place. Since FDIC insurance doesn’t cover fraud or identity theft, you may also want to ask your bank how it will protect you in those events. We hope that this article cleared your vision concerning money market accounts, finding out their benefits and key factors.  We wish you good luck in managing an MMA in case you decide to open one, hopefully, the information provided above answered all your questions.