Can You Lose Money on a Money Market Account?

A money market account (MMA) is a type of interest-bearing deposit account offered by banks and credit unions. It combines characteristics of both savings and checking accounts, often providing higher interest rates than traditional savings accounts while also allowing some transaction flexibility. While generally considered a very safe place to keep funds, understanding the factors that can affect their performance helps clarify whether money can be “lost” in such an account.

How Money Market Accounts Function

Money market accounts serve as deposit accounts at financial institutions. They typically offer more competitive interest rates than standard savings accounts, with rates often tiered, meaning higher balances may earn a greater annual percentage yield (APY). Interest on these accounts is usually calculated daily and credited monthly.

Many money market accounts provide features not commonly found in traditional savings accounts, such as limited check-writing privileges or a debit card for easier access to funds. However, federal regulations limit certain types of withdrawals and transfers from these accounts, typically to six per month. Exceeding this limit can sometimes lead to fees or even a conversion of the account to a checking account. Money market accounts may also require a higher minimum initial deposit or a minimum balance to avoid monthly fees.

Elements Affecting Account Performance

While the principal in a money market account is generally secure, several factors can influence the effective value or purchasing power of the money held within it. The interest rates on money market accounts are typically variable, meaning they can fluctuate with market conditions and economic policies, such as changes in the Federal Reserve’s target interest rate. This variability means rates can rise or fall, impacting total earnings.

Account fees, such as monthly maintenance charges if a minimum balance is not met or fees for excessive transactions, can reduce the net earnings on a money market account. These fees directly diminish the amount of interest earned, and in some cases, could lead to a slight reduction in the principal if earnings are insufficient to cover them. A more pervasive factor affecting the real value of money in any savings vehicle, including money market accounts, is inflation. If the inflation rate exceeds the interest rate earned on the account, the purchasing power of the money decreases over time.

The scenario of a money market account “breaking the buck,” is extremely rare for bank-offered money market accounts. For a bank deposit account, the principal is generally stable. While the effective value can be eroded by inflation or fees, a direct loss of the original principal due to market performance is not a characteristic of money market accounts offered by banks.

Protections for Your Deposits

Money market accounts offered by banks and credit unions are afforded significant protection, making them a low-risk option for saving. The primary safeguard for these accounts is federal deposit insurance. Deposits in banks are insured by the Federal Deposit Insurance Corporation (FDIC), while deposits in credit unions are insured by the National Credit Union Administration (NCUA).

Both the FDIC and NCUA provide coverage up to $250,000 per depositor, per insured institution, for each account ownership category. This means deposits are protected up to this limit, including principal and any accrued interest. Different ownership categories, such as individual accounts, joint accounts, and certain retirement accounts, are separately insured, potentially allowing for greater total coverage at a single institution.

Money Market Accounts Versus Related Investments

It is important to distinguish money market accounts from similar-sounding financial products, particularly money market funds. Money market accounts are deposit products offered by banks and credit unions, similar to savings accounts, and are federally insured. Their primary goal is to preserve capital while offering modest interest.

In contrast, money market funds are mutual funds, which are investment products offered by brokerage firms. While these funds also invest in short-term, low-risk securities, they are not insured by the FDIC or NCUA. Consequently, money market funds carry a slight, though still low, risk of “breaking the buck,” meaning their share price could fall below the typical $1 Net Asset Value, leading to a loss of principal. This risk is virtually non-existent for federally insured money market accounts.

Compared to traditional savings accounts, money market accounts generally offer higher interest rates and may provide more flexible access features like check-writing. Certificates of Deposit (CDs), another type of deposit account, typically offer higher fixed interest rates than money market accounts, but they require funds to be locked up for a specific term, with penalties for early withdrawal. Money market accounts provide greater liquidity than CDs, as funds can typically be accessed without penalty, subject to transaction limits. Therefore, money market accounts balance competitive interest earnings with accessibility, making them a suitable option for short-term savings goals or emergency funds.