Money Market Fund vs High-Yield Savings Account: Key Differences

What a money market fund is

A money market fund is a type of mutual fund. According to the SEC's investor education site, these funds are required to invest in short-term, lower-risk debt and are regulated under a specific rule, Rule 2a-7 under the Investment Company Act of 1940. That rule sets limits on the quality, maturity and liquidity of what the fund can hold.

Many money market funds try to keep a stable share price of $1.00. That is a goal, not a guarantee. The SEC notes that you can lose money in a money market fund, and that the fund's sponsor is not required to step in if the fund loses value.

Government, prime and tax-exempt funds

Money market funds come in a few main types, based on what they hold:

• Government funds invest almost all of their assets in cash, U.S. government securities and repurchase agreements backed by those securities.
• Prime funds can also hold corporate debt, such as commercial paper, which adds some credit risk.
• Tax-exempt (municipal) funds hold short-term debt from state and local governments.

Funds are also split into retail funds, meant for individuals, and institutional funds. The rules about share pricing and fees are not the same for every type, so read the fund's summary prospectus to see which kind it is and what can happen in a period of heavy withdrawals.

The SEC changed its money market fund rules in 2023. Among other changes, it removed funds' ability to temporarily suspend redemptions (known as gates) and changed when certain non-government funds can or must charge a liquidity fee on redemptions. Government funds are generally not required to charge those fees. The fund's prospectus explains how the rules apply to it.

Safety: FDIC insurance vs SIPC

The FDIC states plainly that mutual funds, including money market funds, are not FDIC-insured, even when sold at a bank. A high-yield savings account at an FDIC-insured bank is insured up to $250,000 per depositor, per insured bank, for each account ownership category. See our FDIC insurance guide for how that limit works.

If you hold a money market fund at a brokerage, SIPC may be relevant, but it does a different job. SIPC protects customers of a failed SIPC-member brokerage when securities and cash are missing from their accounts, up to $500,000, including a $250,000 limit for cash. Money market funds count as securities for SIPC purposes. SIPC does not protect against a decline in the value of an investment.

Brokerage "cash sweep" programs are a third thing again. Some sweep cash into deposits at partner banks, where FDIC insurance can apply. Our Wealthfront Cash Account review shows how one sweep program describes its coverage.

How the yields are quoted

A savings account shows an APY, which under federal Truth in Savings rules reflects the total interest paid over a year, including compounding. A money market fund usually shows a yield calculated under SEC rules over a recent short period, often seven days, then annualized. Some funds also show an "effective" version that assumes compounding.

These numbers are both useful, but they are not identical. A fund's 7-day yield looks backward at recent income. A bank's APY is the rate the bank is offering now, and it can change. Neither one tells you exactly what you will earn over the next year.

1. Find the fund's current yield on the fund company's page and write down the date and which yield it is.
2. Find the expense ratio in the prospectus fee table. Fund costs reduce what you earn.
3. Find the bank's APY on its own rate page, with the date and any conditions.
4. Adjust for taxes using the section below, then compare.

Costs and getting your cash out

Most high-yield savings accounts at online banks have no monthly fee, but check each bank's fee schedule. A money market fund charges an ongoing expense ratio, which is taken out of the fund's assets rather than billed to you. Your brokerage may also have its own rules, such as minimum purchase amounts.

Getting cash out also works differently:

• Savings account: you transfer money to your checking account. Timing depends on the bank and transfer method, and the bank may set withdrawal limits.
• Money market fund: you sell shares, the sale settles, and then you move the cash from the brokerage to your bank. Check the firm's settlement and transfer timing so you know how many business days the full trip takes.

Taxes on each

Interest from a savings account is generally taxable as ordinary income at the federal level and by your state. Our guide to taxes on savings interest explains the basics.

Money market fund payouts are dividends, and they are generally taxable too. The difference comes from what the fund holds. Interest on U.S. Treasury securities is exempt from state and local income tax. If a fund earns part of its income from Treasury debt, some states let you exclude that share of the dividend, but the rules vary by state. Funds often publish the percentage of income from U.S. government obligations after year end. Tax-exempt funds hold municipal debt, which has its own rules. A tax professional can tell you how this works where you live.

Side by side: which fits whom

A high-yield savings account may fit people who want deposit insurance, a balance that does not fluctuate, and simple transfers to a checking account.

A money market fund may fit people who already invest through a brokerage, want cash next to their investments, and accept that the fund is not insured. Government funds that hold mostly Treasury debt may be more tax-efficient in states with an income tax.