Are Money Market Accounts Federally Insured?

In the United States, there are two kinds of money market accounts: money market savings accounts and money market mutual funds. In many instances, money market savings accounts are federally insured by either the Federal Deposits Insurance Corporation or the National Credit Union Administration. Money market mutual funds, like all mutual funds, are not federally insured.

Types

Money market mutual funds are designed for short-term investments and for individuals or corporate investors primarily concerned with preservation of principal. Money market mutual funds invest in Certificates of Deposit, U.S.Treasury bills, commercial paper and other conservative investment vehicles.

Money market savings accounts are deposits accounts offered by banks and credit unions. Generally, money market savings accounts pay higher interest rates than regular savings accounts.

Benefits

The FDIC provides insurance coverage of up to $250,000 for an individual's accounts at any one bank. People with funds in excess of $250,000, can increase FDIC coverage by adding co-owners to their accounts. Account holders can also extend FDIC coverage limits by adding pay-on-death beneficiaries to their money market accounts. The NCUA provides the same amount of coverage for people with accounts at member credit unions. Each business entity enjoys $250,000 of coverage per bank, although the FDIC provides no additional coverage for business signers.

Misconceptions

Shares of money market mutual funds are designed to always remain at a par value of $1 per share. Mutual funds are priced each weekday at the close of business of the New York Stock Exchange. People buying or selling shares pay the share price, also known as the net asset value. During 2008, the U.S. Treasury Department announced the creation of a temporary guarantee fund to protect investors assets held in money market mutual funds. Some people mistakenly believe that the Treasury Department still ensures money market mutual funds, but the guarantee program expired in 2009.

Considerations

Not all banks are insured by the FDIC. Some banks are state chartered rather than charted at the federal level. Most states have guarantee funds to ensure deposits held in accounts at state chartered banks. Many credit unions are also state chartered and rely on state guarantee funds to backstop deposit accounts. The FDIC insurance fund, only maintains reserves equal to between $1.15 and $1.50 for every $100 of insured deposit money. Many state guarantee funds use a reserve ratio that matches insured deposits dollar for dollar.

Warning

Many investment advisers caution individual investors against relying too heavily on federally insured deposit accounts. Historically, conservative investments like money markets and savings accounts have not kept pace with inflation. People who invest heavily in these types of accounts safeguard principal risk the steady erosion of their spending power, as the rising consumer price index diminishes the value of their money. Mutual funds containing stocks and bonds provide investors with a greater opportunity to grow their assets over time.

References

• FDIC: Deposit Insurance Frequently Asked Questions
• FINRA: Treasury's Guarantee Program for Money Market Mutual Funds: What You Should Know
• U.S. Securities and Exchange Commission: Money Market Funds
• NCUA: NCUA and FDIC, Virtually Identical
• Securities Investor Protector Corporation: Homepage
• U.S. Securities and Exchange Commission: An Introduction to Mutual Funds.

Resources

• Bankrate.com: Money Market Fund Investing