Are Money Market Funds Safe If the Bank Closes?

The FDIC was established by the Banking Act of 1933. Its purpose was to stop the runs on deposits that were bringing down many banks and savings and loans. Since the start of the Great Depression in 1929, more than 5,700 banks and savings and loans had failed, resulting in the loss of $1.7 billion in deposits. In the first six months of the FDIC's existence, deposit insurance was limited to $2,500. It then rose to $5,000. As of 2013, the limit is $250,000 per depositor per bank.

Individual states may require that banks chartered within their boundaries carry FDIC insurance. The federal government also requires that nationally chartered banks carry the insurance. Banks pay premiums, which go into an FDIC fund that pays out claims. FDIC insurance applies to cash in checking and savings accounts, certificates of deposits, cashier's checks and money market accounts.

Most banks offer money market accounts to their customers. Money market accounts carry more restrictions than a typical savings account and often require higher minimum balances. They also pay higher interest rates. Many banks offer money market accounts that you can access simply by writing a check or using an ATM card. There is no penalty for early withdrawal as there may be for a certificate of deposit.

It's wise to keep in mind the difference between a money market deposit account and a money market mutual fund. The latter invests assets in low-risk securities, such as U.S. government bonds. The FDIC does not insure money market mutual fund accounts. The insurance only applies to deposit accounts. Those people with more than $250,000 in deposits often split their funds between two or more FDIC-insured banks to avoid having uninsured savings.