You can lose money in a money market account, but the risk depends on what type you hold
A money market account at a bank or credit union is insured against loss up to $250,000 per depositor, per institution, by the FDIC or NCUA. You will not lose your principal to the bank failing. However, if you hold a money market fund — which is different — your money is not insured and can decline in value. The distinction matters because both are called "money market" products, and the names sound identical.
Even in an insured money market account, you can lose purchasing power if the interest rate the account pays falls below inflation. If inflation runs at 3 percent and your account earns 1 percent, you are effectively losing 2 percent of your money's real value each year, even though the dollar amount stays the same. This is not a loss you can see in your statement, but it is a real cost to your savings.
Key Takeaways
- Money market accounts at banks and credit unions are FDIC or NCUA insured up to $250,000, so you cannot lose your principal to institutional failure.
- Money market funds sold by brokerages and investment firms are not insured and can lose value if the securities they hold decline.
- Even an insured money market account loses purchasing power if its interest rate falls below the inflation rate.
- The interest rate on a money market account can drop at any time after your initial term ends, which reduces future earnings but does not erase what you have already saved.
- Money market funds that hold longer-term bonds or lower-quality debt carry more risk of principal loss than those holding only short-term Treasury bills.
How FDIC insurance protects your principal in a bank money market account
If you open a money market account at a bank, the FDIC insures your balance up to $250,000. This means if the bank fails, the FDIC will pay you back in full, up to that limit. The insurance covers the account itself, not the interest rate — you are protected against losing your money to the bank's collapse, not against the bank lowering your rate.
The $250,000 limit applies per depositor, per bank. If you have $200,000 in a money market account at Bank A and $100,000 at Bank B, both are fully insured because they are at different institutions. If you have $300,000 at the same bank in a money market account, only $250,000 is insured; the remaining $50,000 is not. Credit unions offer the same protection through the NCUA, also up to $250,000 per account holder per institution.
Why money market funds carry risk that accounts do not
A money market fund is a mutual fund that invests in short-term debt securities — Treasury bills, commercial paper, and other instruments that mature in less than one year. Unlike a money market account, a money market fund is not insured by the FDIC or NCUA. The fund's value rises and falls based on what happens to the securities it holds.
Most money market funds are considered low-risk because they invest in very short-term, high-quality debt. However, they are not risk-free. During the 2008 financial crisis, some money market funds that held commercial paper from failing financial institutions lost value. A fund can also lose money if interest rates rise sharply, because the value of the bonds it already owns declines. If you need to withdraw money when the fund's value is down, you will receive fewer dollars than you put in.
Money market funds are sold through brokerages, investment advisors, and mutual fund companies — not through banks. If you opened your account at a bank and it is called a "money market account," it is insured. If you opened it through a brokerage and it is called a "money market fund," it is not.
Interest rate risk in money market accounts
Banks and credit unions set the interest rate on money market accounts, and they can change that rate after your initial period ends. When rates fall — which happens when the Federal Reserve lowers its benchmark rate — your account's earnings drop. This is not a loss of principal, but it is a loss of future income. If you locked in 4.5 percent and the rate drops to 2 percent, you are earning less, but the money you already saved remains intact.
Some money market accounts come with a promotional rate that applies for a set period — often three to six months — and then revert to a lower standard rate. Read the account agreement to see whether your rate is fixed for a term or variable. If it is variable, the bank can lower it at any time without notice, though in practice most banks give customers a few days' warning before a rate change takes effect.
Inflation erodes the real value of your savings
If inflation is 3 percent and your money market account earns 1 percent, you are losing 2 percent of purchasing power each year. Your account statement will show the same dollar amount, but that money will buy less than it did before. This is not a loss in the traditional sense — you have not lost dollars — but your savings are worth less in real terms.
This risk is why it matters to compare the current interest rate on a money market account to the current inflation rate. When rates are low relative to inflation, money market accounts are a poor place to store money you do not need for several years. When rates are high relative to inflation, they become more attractive. Checking the rate before you deposit is the only way to know whether you are protecting your purchasing power or slowly losing it.
What happens if you withdraw early from a money market account
Most money market accounts allow you to make a limited number of withdrawals per month without penalty — often six. If you exceed that limit, the bank may charge a fee, typically $25 to $35 per excess withdrawal. Some banks will also close your account if you make too many withdrawals, which forces you to move your money elsewhere.
The fee itself is a loss, but it is small compared to the principal. The real risk is that you might need your money when the account's value is temporarily down — though this applies mainly to money market funds, not insured accounts. With an insured money market account, your principal is always there; you just pay a fee if you withdraw too often.
Comparing money market accounts to money market funds
| Feature | Money Market Account (Bank) | Money Market Fund (Brokerage) |
|---|---|---|
| FDIC/NCUA insurance | Yes, up to $250,000 | No |
| Principal can decline | No (insured) | Yes |
| Interest rate risk | Yes (rate can drop) | Yes (rate can drop) |
| Inflation risk | Yes (if rate is below inflation) | Yes (if rate is below inflation) |
| Typical interest rate | Currently 4% to 5% at competitive banks | Varies; often similar to accounts |
| Withdrawal limits | Usually 6 per month; fees apply beyond that | Varies by fund; typically no limit |
Frequently Asked Questions
Can a money market account at my bank go negative?
No. Your principal is insured up to $250,000 by the FDIC. The account balance cannot go below zero unless you overdraw it, which is a separate transaction. The bank will charge an overdraft fee if you do, but your insured balance itself will not decline.
What if the bank lowers my interest rate to nearly zero?
The bank can lower your rate at any time after your promotional period ends. If the rate drops too low, you can move your money to another bank offering a higher rate. You will not lose principal by switching, but you will lose the interest you would have earned at the old rate. Check rates at other banks before deciding to move.
Is a money market fund safer than a savings account?
No. A savings account is FDIC insured; a money market fund is not. A money market fund can lose principal value. A savings account cannot. The trade-off is that money market funds sometimes offer slightly higher rates, but that higher rate comes with real risk of loss.
What type of money market account should I choose to avoid losing money?
Choose a money market account at a bank or credit union, not a money market fund. Ensure the institution is FDIC or NCUA insured. Compare current interest rates to inflation to make sure you are not losing purchasing power. Avoid promotional rates that revert to much lower standard rates after a few months.
Can I lose money if interest rates rise?
In a money market account, no — your principal is insured. In a money market fund, yes — if you own bonds and rates rise, the value of those bonds falls, and if you sell before maturity, you receive less than you paid. This is why money market funds are riskier than insured accounts.