Can a Money Market Account Lose Money?

A money market account (MMA) is an interest-bearing deposit account offered by financial institutions, including banks and credit unions. These accounts combine features of savings and checking accounts, often providing competitive interest rates while allowing limited transaction capabilities. While the term “money market” might suggest investment risk, principal loss in a money market account is extremely rare.

Distinguishing Money Market Accounts from Money Market Funds

A common point of confusion arises from the similar-sounding names of money market accounts and money market funds, yet they are fundamentally different financial products. Money market accounts are deposit accounts provided by banks and credit unions, operating similarly to traditional savings accounts but often with higher minimum balance requirements and potentially better interest rates. These accounts are direct obligations of the financial institution and are insured by federal agencies.

In contrast, money market funds (MMFs) are mutual funds offered by investment companies, not banks. They invest in highly liquid, short-term debt instruments like Treasury bills, commercial paper, and certificates of deposit. Unlike money market accounts, MMFs are investment products and are not federally insured. Their value can fluctuate, though they are designed to be low-volatility investments.

Scenarios for Principal Loss

For money market accounts, principal loss is exceptionally low. Potential loss is primarily tied to financial institution failure, but federal insurance programs mitigate this risk. Fees, such as annual maintenance or excessive withdrawal charges, can indirectly reduce the account balance.

Money market funds carry a different risk profile, though they are still considered relatively low-risk compared to other investments. The primary scenario for principal loss is “breaking the buck,” where the net asset value (NAV) per share falls below its $1.00 target. This occurs if underlying investments lose value, such as due to debt defaults or if fund income doesn’t cover operating expenses. A notable historical instance was the Reserve Primary Fund in 2008, which broke the buck after holding commercial paper from Lehman Brothers, leading to its liquidation and investors recovering less than their initial investment. While rare, such events demonstrate that principal loss is a possibility for money market fund investors.

Safeguards and Investor Protection

Money market accounts benefit from robust federal deposit insurance, providing high security. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits, and the National Credit Union Administration (NCUA) covers credit unions. Both agencies insure accounts up to $250,000 per depositor, per insured financial institution, for each ownership category. This makes principal loss virtually nonexistent for most account holders if a financial institution fails.

Money market funds are not federally insured. Their safety relies on strict regulatory oversight by the Securities and Exchange Commission (SEC) and conservative investment strategies. SEC regulations impose stringent requirements on money market funds regarding investment quality, diversification, and maturity limits. For example, the SEC increased minimum daily liquid asset requirements to 25% and weekly liquid asset requirements to 50%, enhancing their ability to meet redemption requests.

While some funds have sponsors who provide support to prevent breaking the buck, this is not guaranteed. Investments in brokerage accounts, including money market funds, may be eligible for coverage by the Securities Investor Protection Corporation (SIPC), which protects against brokerage firm failure, not investment losses.