Can You Lose Principal in a Money Market Account?

Individuals often question the safety of their principal when considering where to place savings, especially regarding money market accounts. Money market accounts are generally considered very safe for principal, balancing accessibility and interest earnings. This article clarifies the nature of these accounts and explains factors contributing to their security.

Understanding Money Market Accounts

A money market account (MMA) is an interest-bearing deposit account available from banks and credit unions. These accounts combine features of savings and checking accounts, generally offering higher interest rates than traditional savings accounts. They are an attractive option for accessible funds.

MMAs often have higher minimum balance requirements than standard savings accounts. They provide more transactional flexibility, including check-writing or debit card use, but may impose limits on monthly transactions. These accounts are well-suited for short-term savings goals or as a component of an emergency fund, balancing earning potential with liquidity.

Principal Safety and FDIC Coverage

Money market accounts offered by banks are deposit products, protected by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. This coverage applies to both the principal and accrued interest, ensuring protection in the unlikely event of an insured bank’s failure.

For accounts held at credit unions, similar protection is provided by the National Credit Union Administration (NCUA). The NCUA insures deposits up to $250,000 per depositor, per insured credit union, for each account ownership category. Both FDIC and NCUA insurance are backed by the full faith and credit of the U.S. government, providing a robust layer of security for these deposit accounts.

While the $250,000 limit applies per ownership category, individuals can structure their accounts to increase their total insured amount. For example, joint accounts are insured up to $500,000 for two co-owners. Funds held in different ownership categories at the same institution, such as individual and certain retirement accounts, are separately insured. This allows for greater protection for those with substantial savings by diversifying account types.

Comparing Money Market Accounts to Other Deposit Accounts

Money market accounts share federal deposit insurance with other common bank deposit products, making them equally safe for principal up to insured limits. Traditional savings accounts are also insured by the FDIC or NCUA, offering similar principal safety. However, MMAs often provide slightly higher interest rates and more transactional capabilities, such as check-writing privileges, not typically available with standard savings accounts.

Certificates of Deposit (CDs) are another type of insured deposit account. CDs generally offer fixed interest rates that can be higher than MMA rates, especially for longer terms. The trade-off with CDs is liquidity; funds are locked for a specific term, and early withdrawals usually incur a penalty. MMAs offer more flexibility for accessing funds without penalty.

Distinguishing Money Market Accounts from Money Market Funds

Confusion often arises from the similar terms: money market accounts and money market funds. A money market fund is fundamentally different from a money market account. Money market funds are mutual funds that invest in highly liquid, short-term debt instruments, such as U.S. Treasury bills, commercial paper, and certificates of deposit. Unlike bank deposit accounts, money market funds are investment products and are not insured by the FDIC or NCUA.

While money market funds are generally considered low-risk investments and aim to maintain a stable net asset value (NAV) of $1.00 per share, this value is not guaranteed. The risk of “breaking the buck” occurs when the fund’s NAV falls below $1.00, meaning investors could lose principal. Although rare, this has occurred, notably during the 2008 financial crisis when the Reserve Primary Fund’s NAV fell below $1.00 due to its holdings in Lehman Brothers commercial paper.

The Securities and Exchange Commission (SEC) regulates money market funds, imposing rules designed to enhance their resilience and transparency. Despite these regulations, the inherent nature of a money market fund as an investment means it carries a risk of principal loss, unlike a federally insured money market account. Understanding whether a product is a bank-offered money market account or an investment-based money market fund is crucial for assessing principal safety.