FDIC Insurance and Money Market Deposit Accounts

Money market deposit accounts (MMDAs) combine safety of principal along with interest income, which makes for an intelligent cash management product. Here, FDIC insurance is an important backstop, as it is for all banking deposits.

Money Market Deposit Accounts Vs. Money Market Securities  

Money market deposit accounts are separate and distinct from money market securities and mutual funds. Money market securities and funds are investments into credit instruments that mature in less than one year.

FDIC insurance does not back money market securities and mutual funds, because these products are considered to be investments. FDIC insurance, again, only guarantees bank deposits.

FDIC Insurance Coverage Limits

In 2008, the Federal Government temporarily raised FDIC insurance coverage limits from $100,000 to $250,000, as part of a package to stabilize the economy through the depths of the Great Recession. Now, the temporary increase appears permanent, as FDIC insurance still guarantees $250,000 in deposits per customer, per bank.

The FDIC defines bank deposits as checking, savings, and money market deposit accounts, along with certificates of deposit (CDs). Savers should consider dividing one lump sum of cash between several different banks to maximize FDIC coverage.

For example, you may divide $1 million into five separate $200,000 money market deposit accounts at five separate banks to insure the entire amount.  

Money Market Deposit Account Returns

Banks are not obligated to invest money market deposit account cash into money market securities. Still, expect money market deposit account rates and returns to closely follow the federal funds rate. Now, for 2024, the federal funds rate is slightly higher than 5%.

Financial Strategy

As always, savers must be willing to accept minimal rates of returns, in exchange for safety. In the short run, MMDAs may outperform both stocks and bonds through inflationary environments. As such, these cash management products have been especially popular post COVID-19, with annual inflation rates approaching 10%.

Over the long-term, however, money market deposit accounts expose savers to the opportunity cost risks of forgone and spectacular stock market profits. Money market deposit accounts are best used to establish acceptable cash reserves and to also finance medium-term savings goals, such as a start-up business, car, or home down-payment.