MMA vs MMF: Key Differences Between Money Market Accounts and Funds

Money market accounts (MMAs) and money market funds (MMFs) are often confused due to their similar names, but they serve different purposes. One is a bank product that offers stability and insurance protection, while the other is an investment vehicle with varying levels of risk. Understanding these differences helps in making informed financial decisions.

While both options provide a way to earn interest on cash holdings, their structure, accessibility, and regulatory protections set them apart.

Core Structure

Money market accounts (MMAs) are deposit accounts offered by banks and credit unions, combining features of savings and checking accounts. They typically require a higher minimum balance than standard savings accounts but offer better interest rates. Because they are held at financial institutions, they are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions, covering up to $250,000 per depositor, per institution.

Money market funds (MMFs), in contrast, are investment products managed by asset management firms. These funds pool money from multiple investors to buy short-term, high-quality debt instruments such as Treasury bills, commercial paper, and certificates of deposit. Unlike MMAs, MMFs are not insured by the FDIC or NCUA, meaning investors assume some risk, especially during financial downturns. The value of an MMF is generally maintained at $1 per share, but in rare cases, funds have “broken the buck,” meaning their net asset value (NAV) fell below $1, leading to potential losses.

Earnings Distribution

Money market accounts (MMAs) earn interest at a rate set by the financial institution, which may be fixed or variable depending on market conditions. Interest is typically compounded daily and credited monthly. The rate is influenced by factors such as Federal Reserve policy, the bank’s pricing strategy, and market competition.

Money market funds (MMFs) generate returns through dividends from interest earned on their underlying short-term debt securities. These dividends may be distributed daily, weekly, or monthly, depending on the fund’s structure. Unlike MMAs, where rates are set by the institution, MMF yields fluctuate based on the performance of the fund’s investments. The Securities and Exchange Commission (SEC) requires MMFs to disclose their seven-day yield, an annualized measure of the fund’s short-term return.

Tax treatment differs between the two. Interest earned from MMAs is subject to federal, state, and local income taxes. MMF dividends can have different tax implications depending on the fund’s holdings. Tax-exempt MMFs invest in municipal securities, allowing investors to receive income free from federal taxes and, in some cases, state and local taxes if they reside in the issuing jurisdiction. Investors in taxable MMFs must report dividends as ordinary income, which could be taxed at rates up to 37% for high earners in 2024.

Liquidity and Withdrawals

Money market accounts (MMAs) function like traditional bank accounts, allowing withdrawals via checks, debit cards, or electronic transfers. While federal regulations previously limited certain withdrawals to six per month, this restriction was lifted in 2020, giving banks discretion over their policies. Some institutions still impose limits or charge fees for excessive transactions.

Money market funds (MMFs) allow investors to redeem shares at any time, but the process differs from withdrawing cash from a bank account. Redemptions are typically settled within one business day. Institutional MMFs may impose liquidity fees or redemption gates during periods of market stress, while retail MMFs generally allow same-day access without restrictions.

Regulatory and Insurance Coverage

Money market accounts (MMAs) are regulated by banking authorities such as the Office of the Comptroller of the Currency (OCC) for national banks and state banking regulators for regional institutions. These agencies enforce capital requirements, reserve ratios, and consumer protection laws to ensure financial institutions remain solvent. Regulation D of the Federal Reserve previously imposed transaction limits on MMAs, but its suspension in 2020 allowed banks to set their own withdrawal policies.

Money market funds (MMFs) fall under the oversight of the Securities and Exchange Commission (SEC) and are governed by Rule 2a-7 of the Investment Company Act of 1940. This rule imposes strict portfolio requirements, including credit quality, liquidity thresholds, and weighted average maturity limits, to minimize risk. Institutional prime MMFs, which invest in corporate debt, have floating net asset values (NAVs), meaning their share prices can fluctuate. Retail and government MMFs maintain a stable $1 NAV as long as liquidity requirements are met. In times of market stress, the SEC permits liquidity fees and redemption gates to prevent large-scale withdrawals that could destabilize the fund.