Both money market accounts and certificates of deposit (CDs) are great short-term investment options that can pay you more interest than traditional savings accounts to help you reach your personal finance goals. But as you evaluate money markets vs. CDs, there are a variety of factors to consider before making a selection.
We created this guide to help you do that. Read on to learn more.
Table of Contents
- What is a money market account?
- What is a certificate of deposit (CD)?
- Pros and cons of money market accounts and CDs
- Differences between money market accounts and CDs
- When is it better to choose a CD over a money market account?
- When is it better to choose a money market account over a CD?
- Where can you obtain a money market account or CD?
- Money market vs. CD FAQs
What is a money market account?
A money market account is a type of savings account offered by banks and credit unions. They tend to pay higher interest rates than traditional saving accounts but may have some restrictions, like transaction limits, minimum opening deposit amounts and minimum balances.
It’s also important to note a money market account isn't the same thing as a money market fund, which is a mutual fund that invests in high-quality, short-term securities and pays dividends. Money market funds have different regulations and may place more restrictions on how you use your money, and since they are investment products and not deposit products, they aren’t FDIC-insured.
How do money market accounts work?
Money market accounts combine features of high-yield savings accounts and checking accounts. They pay higher interest rates than traditional savings accounts and often provide checks or debit cards you can use to spend funds in the account. This hybrid model can be beneficial for people who need to prioritize liquidity while also pursuing their savings goals.
What is a certificate of deposit (CD)?
Certificates of deposit are a more restrictive savings option that are also offered by banks and credit unions. When you put your money into a CD, you agree to leave it there for a fixed term. Maturity dates for CDs range from as short as one month to over five years. Because of their fixed terms, if you need to make an early withdrawal, you will face penalties that can erase the interest you earned.
How do CDs work?
CDs pay a fixed interest rate over a specified number of months or years. When you purchase a CD, you agree to leave your money in it until the maturity date. At that point, you have the option of withdrawing your full initial investment and the interest you’ve earned, or having those funds roll over into a new CD.
Pros and cons of money market accounts and CDs
Money market accounts
- Let you access your funds via checks or debit cards
- No early withdrawal penalties
- Insured by the FDIC
- May have monthly withdrawal limits
- Interest rates may fluctuate based on changing market conditions
- Typically offer fixed interest rates for predictable earnings
- Insured by the FDIC
- Generally pay higher interest rates than money market accounts
- You can't access your funds before the CD's maturity date without incurring penalties
- If you open a CD when interest rates are low, you may not benefit from future rate increases
Differences between money market accounts and CDs
Though money market accounts and CDs are both good options to increase the earnings on your savings, there are some key differences to be aware of.
Risk and return potential
The risk of both account types is low given that each typically includes FDIC insurance up to $250,000 for sole accounts and $500,000 for joint accounts. This means that even if your bank makes poor investment decisions and collapses, the FDIC ensures you will be paid back up to $250,000 for individuals or $500,000 for joint accounts.
CDs may offer better returns, but they limit access to your funds until their maturity dates arrive. The return potential of each account type is impacted by the current effective federal funds rate (EFFR), which is set by the Federal Reserve.
CDs typically pay higher interest rates than money market accounts because your money is inaccessible without penalty for a set term. That gives your banking institution more flexibility in how it uses the deposit to pursue the best returns while not having to return the principal and interest to you until the date of maturity.
Money market accounts are more liquid than CDs. They let you make ATM withdrawals and pay for things with checks or debit cards. However, your bank or credit union could still place limits on how you use the funds. For example, it might only allow a certain number of debit card transactions per month.
If you’re interested in pursuing a CD, it’s important to verify your institution’s withdrawal policies before proceeding.
Minimum deposits and minimum balances
Minimum deposit requirements vary on a case-by-case basis. Whether for money market accounts or CDs, those amounts are determined by the bank or credit union you choose to invest with. Many institutions offer multiple options with different minimum deposit amounts to appeal to a broader array of potential depositors.
In the case of money market accounts, some may require you to maintain a minimum balance in order to receive the maximum interest rate. That amount is generally higher than what is required for traditional savings accounts.
When is it better to choose a CD over a money market account?
CDs have some specific benefits that money market accounts can't match. You might choose a CD for any of the following reasons.
You want to lock in a rate
CDs offer fixed interest rates. If you want to take advantage of a high-rate environment and lock in a good APY over the long term, a CD may be one of the best options for growing your savings.
However, this typically only makes sense when interest rates are elevated or potentially near their peak. If you expect rates to increase throughout the lifespan of your CD account, choosing a money market account or savings plan with a variable rate could be the smarter option.
You want to minimize your risk
Both money markets and CDs are low-risk savings options, as they both carry FDIC insurance. But CDs also minimize other types of risk, like sudden drops in interest rates, by offering fixed terms .
You have a longer investment horizon
CDs can be longer-term savings vehicles. Though many are offered in short-term maturities, they can also have terms ranging from two years to more than five years.That makes them a good choice for savers with time-based goals.
For example, if you plan on using your savings as a down payment on a home in five years, placing those funds into a CD will allow you to earn consistent, predictable interest payments with little to no risk while you wait for that day to arrive.
When is it better to choose a money market account over a CD?
On the other hand, money market accounts also offer unique benefits. The following reasons might lead you to choose this savings option over a CD.
When liquidity is a priority
Money market accounts are much more liquid than CDs. You can typically use the funds to pay for goods and services through checks, ATM withdrawals and debit card transactions, whereas with a CD, you would be penalized for early withdrawals.
That liquidity is the principal advantage of a money market account. They also provide higher interest rates than a standard savings account, but usually have lower rates than CDs. So if you have savings that you want to continue using, but you’re not happy with the current bank interest rate you’re getting, a money market account could be a great option.
You have short-term financial goals
Money markets let you earn extra interest on savings you plan on using soon but not immediately. Their liquidity and solid interest rates make them one of the best short-term investments for those who aren’t pursuing longer-term financial goals, or for those who want to take advantage of interest rates in the near term before reallocating funds to other investments.
You prefer to avoid early withdrawal penalties
Money market accounts may still be worth considering if you have long-term savings goals. They provide flexibility, allowing you to withdraw and use your savings as you need to without having to worry about early withdrawal penalties. Money market accounts make it easier to adapt as your financial needs change.
Where can you obtain a money market account or a CD?
Some major and online banks offer both savings products. However, although each of the four institutions below offers CDs, only Ally explicitly advertises a money market account.
Bank of America offers several CDs to choose from. They range from as short as 28 days to as long as 10 years. The current minimum opening deposit is $1,000 across all options, but none allow additional deposits after the CD is purchased. Bank of America also offers a flexible CD option, which pays a lower interest rate than a standard CD, but allows you to withdraw your funds without penalty except for withdrawals made within six days of the initial deposit or within six days following a partial withdrawal.
If you want to make an early withdrawal from another Bank of America CD, your penalty will vary based on the length of the CD agreement. For example, CDs with maturities under 90 days have an early withdrawal penalty equal to the greater of all interest withdrawn or seven days of interest payments. But if your CD lasts 60 months or longer, the penalty will be equal to 365 days of interest on the amount withdrawn.
Wells Fargo offers CDs with maturity dates ranging from three months to one year. The bank requires minimum opening deposits of $2,500 for all CDs except for its five-month special fixed rate CD, which requires an opening deposit of at least $5,000. This is a higher minimum balance than the initial deposit requirements set by the other interest-bearing accounts on our list.
One additional item to note is that Wells Fargo offers slightly higher interest rates to customers who connect their new CDs to existing checking accounts at the bank. However, their “Relationship Interest Rate” is variable and can be changed at any time without notice.
Chase has CDs with maturities as short as one month and as long as 10 years. These all require a minimum opening deposit of $1,000. However, the rate you earn can increase if you deposit more and link your existing Chase checking account to the CD. For example, customers who deposit over $100,000 into a CD and link their accounts will get the best possible rates from the bank.
Chase’s publicly-available CD rates are for clients with existing bank accounts at the institution. The company instructs non-clients interested in Chase CDs to speak with a banker about opening an account or taking out Chase credit cards to enjoy superior relationship rates.
Ally’s CDs have no minimum balance requirements and range from three months to five years. The bank also offers rewards for subsequent renewals. The loyalty interest rate boost that you receive will vary based on current market conditions. However, Ally Bank currently offers a high APY compared to the other money market accounts and CDs on this list.
Ally also offers the same interest rate across all money market account balance tiers. This gives you the same rate of interest income regardless of whether you hold under $5,000 or over $25,000 in the account. Additionally, Ally allows you to make withdrawals from your money market account from any of its 43,000 All-Point ATMs for free.
Money market vs. CD FAQ
Can I withdraw money from a money market account or CD before the term ends?
Are money market accounts and CDs FDIC-insured?
How are money market accounts and CDs taxed?
Which investment is considered safer, CDs or money market accounts?
Both CDs and money market accounts are safe investments. They typically include FDIC insurance and don't involve the purchase of securities that may fluctuate in value.The only situation in which your investment could be at risk is if the financial institution at which you open the account declares bankruptcy. However, even if that happens, the FDIC will repay up to $250,000 for individual accounts or $500,000 for joint accounts.
What do I need to consider when choosing money market accounts and CDs?
How liquid you need your funds to be in the future may be the biggest determining factor in which account type is right for you. Money market accounts are highly liquid, whereas you can rarely access funds in CDs without penalty before the maturity date.You may also want to look at current interest rates for money market accounts and CDs at your financial institution of choice. Some may offer higher rates for CDs. There may also be differences in the number of withdrawals you can make from money market accounts and various monthly fees you may be responsible for.