Money Market Accounts
A money market account is a deposit account offered by a bank or credit union. Money market accounts are savings accounts that generally pay a higher rate of interest than traditional checking or savings accounts.
Banks and credit unions that offer these accounts typically have various rules in place that you must satisfy to earn their best interest rate. Tiered interest rate schedules with high account minimums necessary for you to earn the best interest rate are a very common practice. Some banks may waive minimums and tiered schedules but instead require you to maintain a checking account that pays no interest and requires a minimum balance in the checking account. Other banks even have slot schemes for their preferential interest rate requiring you to keep funds in the account over a certain minimum but below a certain maximum. For example, as of July 25, 2025, Huntington Bank offers a money market account that requires you to maintain a minimum of $25,000 in the deposit account and not exceed a maximum of $2,000,000 in the account. If your balance goes below $25,000 or above $2,000,000, your entire balance will automatically earn a much lower interest rate! Finally, your bank may also require that you transfer new funds to the money market account to receive the best interest rate. If you already have funds at the bank, you cannot use those funds to qualify for their best interest rate. Instead, you will need to bring new funds to the bank.
Interest earned from money market accounts is paid monthly. This interest will be taxed at ordinary income tax rates for both Federal and State income tax purposes.
Money market accounts rarely pay as much as treasury bills.
Pros
- FDIC Insurance
- Liquid
Cons
- No State Tax Benefits
- Various Schemes to Receive the Best Interest Rates
- Tiered Schedules
- Account Minimums
- Account Maximums
- Slot Schedules
- New Money Transfer Requirements
- No Interest Checking Account Requirements
- Potential account fees if you fall below account minimums
- Potentially reduced interest rate if account value drops below account minimums or above maximums
- Transactions are limited
- Generally, pays less than treasury bills
Money Market Mutual Funds
Money market mutual funds are investments that you can purchase from a brokerage firm. The investment objective for a money market mutual fund is a high level of current income consistent with preservation of principal and liquidity. Money market mutual funds typically invest in 0 – 6 month U.S. treasury bills, other U.S. government securities and repurchase agreements. Money market mutual funds pay monthly dividends.
Even though the source the income earned in a money market mutual fund is interest income, the monthly dividend paid to investors is treated as an ordinary dividend for tax purposes. Ordinary dividends have the same tax treatment as interest income.
Money market mutual funds have more favorable tax treatment when compared to money market accounts. Money market mutual funds will often have some or even all the fund assets invested in U.S. treasury bills and other U.S. government securities. U.S. government securities are state income tax exempt. Therefore, a portion of the dividend and potentially all the dividend from a money market mutual fund will be state income tax exempt. Federal income tax will still apply to the dividend.
Money market mutual funds are liquid, with same day settlement for sales of funds. Money market mutual funds are designed with stability of principal in mind and use cost basis accounting instead of fair market value accounting for the underlying investments in the fund. By valuing investments in the fund at the purchase price, the fund can maintain a stable $1 share price. Only in very rare circumstances do money market mutual funds exhibit share price volatility or have the share price go below the $1 target share price.
Money market mutual funds will have an expense ratio associated with the fund. The expense ratio is how the manager who runs the fund gets paid. For example, Fidelity Government Money Market Fund (SPAXX) costs .42% per year as of July 2025. The fees paid to the fund manager are not transparent and will simply be debited from your assets in the fund.
Tax reporting for money market mutual funds can be complicated. Many custodians such as Fidelity and Vanguard do not separately report the exact amount of your mutual fund’s dividend that came from U.S. government securities on tax form 1099. Instead, you must manually calculate the portion of the fund’s dividend that consists of interest earned from U.S. government securities. Be aware that money market mutual fund percentage of U.S. government securities holdings is likely to change from year to year! Once you have determined how much of your dividend came from U.S. government securities, then you can take the deduction on your state income tax return. When preparing your state income tax return, this deduction normally requires a manual entry in the tax software. Be sure not to forget this important step!
Pros
- State Tax Benefits from owning U.S. Government Securities
- Liquid
- Generally, pays higher interest vs money market accounts
- SIPC Insurance Coverage if the brokerage firm fails
- No Withdrawal Limitations
- No Transaction Limitations
- No Account Minimums for many money market mutual funds
Cons
- Complicated Tax Reporting
- Expense ratio reduces yield
- No transparency with fees
Conclusion
Money market mutual funds are the clear winner for short term investing when compared to money market accounts. You will receive more favorable state tax treatment, a potentially higher interest rate and you can bypass the various schemes that banks and credit unions impose to qualify for their best interest rate.
Ethan S. Braid
President
HighPass Asset Management
Denver, Colorado