Is a money market account considered income?
The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.
The money market is part of the fixed-income market that specializes in short-term debt securities that mature in less than one year. Most money market investments mature in three months or less. These are considered to be cash investments because of their quick maturity dates.
Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.
A money market fund generates income (taxable or tax-free, depending on its portfolio), but little capital appreciation.
Money market accounts are a type of deposit account that earns interest. Rates are often higher than traditional savings accounts. Money market accounts typically limit your withdrawals per month and have a higher minimum balance requirement than traditional savings accounts.
Money market funds are divided into two categories: taxable and tax-free. If you're buying a taxable fund, any returns from the fund are generally subject to regular state and federal taxes.
Income generated by a money market fund can be either taxable or tax-exempt, depending on the types of securities in which the fund invests. U.S. Securities and Exchange Commission (SEC) regulations define 3 categories of money market funds based on investments of the fund—government, prime, and municipal.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't. Banks use money from MMAs to invest in stable, short-term securities with minimal risk that are liquid.
Both CDs and MMAs are federally insured savings accounts, so they're equally safe.
Can money market funds lose value?
Money market funds aren't risk free
While money market funds typically invest in lower-risk assets, experts say it's important to know the funds aren't risk free. “It's a rarity that such funds lose value,” said CFP Randy Bruns, founder of Model Wealth in Naperville, Illinois.
Money market accounts are considered safe, low-risk investments. They earn interest and allow for easy access to your money. Your balance is also FDIC-insured, so it's unlikely that you'll lose money. However, fees and interest rate changes could deplete your returns.
Income earned from money market fund interest is taxed as regular income, up to 37% depending on the investor's tax bracket. While some local and state taxes offer breaks on income earned from U.S. Treasury bonds, federal income tax still applies.
Type of account: As of February 2024, no banks are offering a 7% interest savings account. However, two credit unions are offering that rate for one of their top-tier checking accounts. Get to know the differences between checking and savings accounts to see if the APY is worth the switch.
A money market account is neither a checking nor a savings account but has certain characteristics similar to both. Like regular checking accounts, money market accounts allow account holders to make withdrawals and transfers, and write checks.
A money market account is a type of savings account that usually offers a higher interest rate and easier access to your money than a typical savings account. That means you can get checks or a debit card to spend the money in your account—though you might be limited on how often you can make a withdrawal.
The interest money market accounts earn is taxable by the IRS. The good news is, taxes on your money market earnings won't exceed your earnings themselves, and reporting interest earnings on your taxes is easy to do.
You are required to report any interest you have earned from a savings account on your tax return. And bear in mind that the IRS already knows about how much interest you have received. Banks report to the IRS any interest payments of $10 or more and send a copy of this report to you.
Checking accounts, savings accounts and money market accounts can all be subject to an IRS tax levy. If the funds in your bank account are enough to satisfy your tax debt then the IRS may stop there.
A money market account is a type of savings account opened at a bank or a credit union. These accounts are federally insured. A money market fund is a type of mutual fund that invests in short-term money market instruments. These funds are not federally insured.
Is a money market considered an investment?
A money market mutual fund account is considered an investment, and it is not a savings or checking account, even though some money market funds allow you to write checks.
Money market funds have benefits such as diversifying your investment portfolio and providing regular income payments. But your money won't be federally insured and you may incur fees.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
Money Market Accounts
However, some currently have an interest rate from from 3.25% up to 5.46%. So, your $10,000 can earn as much as $325 to $546 in interest this year.
How much is too much cash in savings? An amount exceeding $250,000 could be considered too much cash to have in a savings account. That's because $250,000 is the limit for standard deposit insurance coverage per depositor, per FDIC-insured bank, per ownership category.
