|What is it? Money market deposit accounts are like money market mutual funds, but deposit accounts are FDIC insured, while mutual funds are not.Banks, savings and loan associations, and credit unions began offering money market deposit accounts in 1982 in response to the growth of money market mutual funds that were being offered through brokers and mutual fund companies.The rate of interest paid on money market deposit accounts rises and falls with interest rates in general. Most financial institutions require a minimum deposit and may charge you fees if your balance falls below a minimum level.Depositors earn interest (usually credited daily) based on current money market rates, which are usually reset weekly. Money market deposit accounts typically earn a rate of interest that is higher than rates paid on savings or checking accounts but lower than rates paid on certificates of deposit (CDs).
Flexibility and liquidity It’s easy to open a money market deposit account, and you can make deposits and withdrawals virtually whenever you like. The highly liquid nature of these accounts makes them valuable for storing money you want to hold in reserve for future use or in case of an emergency.
Higher interest rates than savings accounts Because money market deposit accounts invest in short-term debt instruments offering the potential for relatively high yields, they usually provide a return that is approximately one or two percent greater than a traditional savings account.
FDIC insured Most money market deposit accounts offered by chartered institutions are insured for up to $250,000 per depositor per bank by the Federal Deposit Insurance Corporation (FDIC). Retirement accounts also are generally insured up to $250,000. Credit unions provide comparable insurance coverage. This insurance applies to each ownership format per bank. For example, a married couple with $250,000 each in accounts owned separately by each person and an additional $400,000 in an account held jointly in both their names would qualify for FDIC coverage of the entire $900,000.
Restrictions may apply Some money market deposit accounts require large minimum deposits and may limit the number of withdrawals you can make during any given period. If you fail to maintain a minimum balance or if you exceed the permitted number of withdrawals, a penalty fee may be imposed. In addition, although some money market deposit accounts offer check-writing privileges, your bank may limit the number of checks you can write during a period or impose a minimum amount per check.
Tax considerations Generally, interest on a money market deposit account is taxable in the year it is earned.
Protection for Banking and Investment Assets
|Federal Deposit Insurance Corporation (FDIC)||Securities Investor Protection Corporation (SIPC)||National Credit Union Share Insurance Fund (NCUSIF)|
|What it is||An independent agency of the federal government, backed by the full faith and credit of the U.S. Treasury||A nonprofit corporation funded by its members, who are broker-dealers registered with the Securities and Exchange Commission||An independent agency of the federal government, backed by the full faith and credit of the U.S. Treasury|
|What’s covered?||All deposits plus interest earned in checking/NOW/savings accounts, money market deposit accounts, and time deposits (e.g. CDs)||Investments registered with the SEC and cash in the event that a firm experiences insolvency, unauthorized trading, or securities that are lost or missing from a customer’s account||All deposits in regular share accounts, share draft accounts, share certificates|
|What’s not covered?||Investment losses on any securities, such as mutual funds (including money market funds**), stocks, bonds, life insurance policies, annuities, or other securities, Safe deposit boxes||Investment losses on any securitiesInvestments that are not registered with the SEC, such as certain investment contracts, limited partnerships, fixed annuity contracts, currency, gold, silver, commodity futures contracts, or commodities options||Investment losses on any securities, such as mutual funds (including money market funds**), stocks, bonds, life insurance policies, annuities, or other securities, Safe deposit boxes|
|Limit for single-owner accounts||$250,000 (includes all such accounts owned by the same person)||$500,000, including up to $250,000 in cash||$250,000 (includes all such accounts owned by the same person)|
|Limit for retirement accounts||$250,000 (includes all retirement accounts owned by the same person)||$500,000 per account, including up to $250,000 in cash||$250,000 (includes all traditional and Roth IRAs; Keoghs covered separately up to $250,000)|
|Limit for joint accounts||$250,000 per joint owner (includes all joint accounts owned by the same person)||$500,000 per account||$250,000 per joint owner (includes all joint accounts owned by the same person)|
These are some of the most common insured accounts. Additional categories of ownership, such as trusts, may offer additional protection and use category-specific ways of determining coverage limits. All limits apply to accounts at a single institution. If you have accounts at more than one insured institution, you qualify for coverage up to the full amount at each one.
**An investment in a money market mutual fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Before investing in a mutual fund, carefully consider its investment objectives, risks, charges, and expenses, which are contained in the prospectus available from the fund. Read the prospectus carefully before investing.
Reprinted by permission from Forefield, Inc.