Money market accounts, money market mutual funds and certificates of deposits are all types of low-risk savings products. Some financial institutions, such as credit unions, refer to certificates of deposit as share certificates or money market certificates. The interest you earn on your money market certificates is typically taxable unless you hold them in a tax-advantaged account.
The Internal Revenue Service considers all income, including interest income from your money market certificate accounts, to be taxable unless it is specifically exempted from taxation by law. The interest is taxable in the year it is made available to your account, so even if the maturity date of your certificate extends beyond the end of the year, you'll owe taxes on the portion of the interest that was earned during the previous year.
Dividends vs. Interest
If you have your money market certificate with a credit union, the income produced might be credited to your account as a dividend. The IRS doesn't make a distinction between interest paid on a bank account and dividends paid on a credit union share account. As far as the IRS is concerned, both payments are forms of interest. Your bank or credit union should provide you with a Form 1099-INT after the end of the year detailing how much taxable interest your certificate earned during the tax year.
Tax Deferred Accounts
In most cases, the interest from your money market certificates is taxable as it is earned, but you can defer paying taxes on that money if you hold your money market certificates in a tax-advantaged account, such as a traditional individual retirement account. You can typically deduct your contributions to your traditional IRA, up to the maximum allowed by law, and taxes on the earnings produced by the investments in your IRA are deferred until you withdraw funds from the account.
Money Market Mutual Funds
Some investment companies offer tax-exempt money market funds. You should not confuse these investments with money market certificate accounts. Tax-exempt money market funds are not insured by the Federal Deposit Insurance Corporation, the National Credit Union Administration or any other federal agency. Although they are considered to be low-risk investments, tax-exempt money market funds are not risk-free. While dividend payments from tax-exempt money market funds might be free from state and federal income taxes, certain types of distributions, such as capital gains distributions, might be subject to taxation.
- Pentagon Federal Credit Union: Money Market Certificates
- Ally Bank: Money Market vs. Certificate of Deposit (CD)
- Internal Revenue Service: Topic 403 - Interest Received
- CNN Money: What is an IRA?
- Internal Revenue Service: Publication 550, Taxable Interest — General
- Federal Deposit Insurance Corporation: Insured or Not Insured?
- National Credit Union Administration: Frequently Asked Questions
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.