Are money market accounts FDIC insured?

A money market account is a type of savings account issued by a bank or credit union. These accounts earn higher interest than savings accounts and offer many features of a checking account. In case you’re wondering, yes – money market accounts are FDIC insured.

They include many of the same features of a traditional checking account, with higher interest fees and the ability to cash out your funds without penalty. You can typically expect to earn 0.5% Annual Percentage Yield (APY) without fees, though there is a minimum balance requirement.

What is FDIC insurance?

The Federal Deposit Insurance Corporation (FDIC) is a government agency that protects the money you deposit into a bank account. FDIC insurance covers your losses (up to $250,000) in case a bank goes out of business. When that happens, FDIC insurance reimburses your funds. This ensures consumer confidence in the U.S. banking system and provides peace of mind for clients depositing large amounts of funds into bank accounts.

Pros and cons of a money market account

There are several advantages and disadvantages to money market accounts. Before opening one, you should be aware of all the pros and cons. This will help you determine whether this type of account is the best banking option for you.

Pros

Earns higher interest rates than savings accounts
You can access your money without penalty
Your funds are FDIC insured

Money market accounts provide the convenience of checking accounts with the benefits of savings accounts. They earn higher interest rates than savings accounts and still let you access your money, though there is a limit on withdrawals. Since they’re FDIC insured, you can keep a large amount of your cash in a money market account. You’ll earn interest and rest assured you won’t lose it in case the bank goes out of business

Cons

High minimum balance required
APY offered is lower than inflation
Limit of six withdrawals per month

While money market accounts generally offer higher interest rates than checking or savings accounts, that’s not always the case. For example, Discover is currently offering 0.35% APY on their money market account and no minimum balance requirement.

Meanwhile, Ally is offering 0.5% on their online checking accounts. In this case, you might actually be better off with an Ally savings account, since it offers a higher interest rates, no fees or minimums.

How and where to open a money market account

A money market account is a great option if you’re looking for a high-interest, low-risk place to put your funds. These accounts generally don’t impose service fees if you meet a minimum balance requirement. So it can be preferable to checking accounts that do charge monthly fees. Since you’ll generally get higher interest rates than a savings account, it’s a good alternative

With the best features of a checking and savings account, it’s a good alternative. However, keep in mind that while balance requirements are large, the interest rate will often be lower than inflation. So in the end, your money will lose its value.

Frequently Asked Questions

Here is a round-up of the most common questions regarding money market accounts.

Does FDIC insurance cover money market accounts?

FDIC insurance covers money market accounts up to $250,000. So if your bank goes out of business, the funds you have deposited are protected.

Do money market accounts have fees?

Money market accounts do not have recurring fees if you meet the minimum deposit requirement. It varies by bank.

Can you lose money in a money market account?

Since your money market account is FDIC insured, you can’t lose money unless you deposit more than $250,000 and the bank goes out of business. You’re essentially lending it to the bank at a set interest rate. No matter what the bank does with the funds, you will earn the specified interest.

That being said, it is possible to “lose” money with this type of account, since the interest rate is lower than annual inflation. For example, the inflation rate in 2020 was 1.4%, while most money market accounts paid of 0.5%. So if you kept your money in one of these accounts last year, it lost value.

What are the disadvantages of a money market account?

Disadvantages include high balance requirements and relatively low interest rates. Right now, you can get about 0.5% APY on a money market account, which is about a third of the inflation rate. So by using this type of account, your money will lose value.

A better option would be to put the funds in an S&P 500 Index fund, which has seen average annual returns of 9% over the last 90 years.

How much are money market accounts insured for?

Money market accounts are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).

Are money market funds safe in a recession?

Money market funds are fairly safe in a recession, since they are insured and you’re guaranteed a flat return on your deposit. However, you might be better off investing your money elsewhere during a recession. With high stock yield potential during a down market, investing in the S&P 500 or tech stock might be more lucrative.

For example, Apple stock hit a 52-week low of $53.15 during the onset of the coronavirus pandemic. A mere 10 months later, the stock has rebounded to $128 per share. Investing $10,000 in a money market account may have earned you $50 over the course of a year. Investing that money in a bluechip stock like Apple would have generated over $14,000 in profit.

Related reading: 23 legit ways to make $500 a week from home

How is interest calculated on a money market account?

Interest is compounded on money market accounts, so you’ll earn more over time, even if you don’t add to your balance. For example, if you have $10,000 in a money market account that earns 0.5% APY, you’ll earn $50 a year in interest. The following year, assuming the APY doesn’t change, you’ll earn 0.5% on $10,050, which comes up to $50.25. That’s not exactly enough to retire on, which is why you should explore all your options.

Best money market account rates for 2021

BrioDirect currently offers the highest interest on money market accounts, at 0.65%. You do need a minimum $25,000 balance to qualify for this rate. Meanwhile, Discover offers a money market account with 0.35% APY and no minimum balance requirement.

When do money market accounts pay interest?

Most banks pay interest on your money market account every month. That’s great if you want to

Can you withdraw money from a money market account?

Yes, you can withdraw money from a money market account without penalty. Just keep in mind that there is usually a limit on the number of withdrawals you can make each month.

Where to open money market account

You can open an account at most banks and credit unions. The APY can range from 0.35% – 0.65%. Be sure to compare rates before settling.

Are money market accounts taxable?

The interest you earn on a money market account is taxable as income. Current tax brackets range from 10% – 35%. So how much tax you pay on the interest from your money market account depends on which tax bracket you fall into:

10% for individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly)
12% for income over $9,950 ($19,900 for married couples filing jointly)
22% for income over $40,525 ($81,050 for married couples filing jointly)
24% for income over $86,375 ($172,750 for married couples filing jointly)
32% for income over $164,925 ($329,850 for married couples filing jointly)
35%, for income over $209,425 ($418,850 for married couples filing jointly)

Who should open a money market account?

You should use a money market account as an alternative to a checking account. You’ll earn higher interest on your funds and you generally won’t pay any monthly fees if you meet the minimum balance requirements. If the minimum is low, using this type of account may be a good option

However, if the minimum is high (i.e. $10,000 or more) then you may be better off considering investment options with higher returns.

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