Money Market Account vs Certificate of Deposit

Both certificates of deposit (CDs) and money market accounts (MMAs) are types of savings accounts that tend to earn higher interest rates than traditional savings accounts. But there are some key differences between them.

An MMA allows you to withdraw money as needed (and typically comes with checks or a debit card), though you may be limited to a certain number of transactions per month. With a CD, on the other hand, your money is locked up for a set period of time. In exchange for leaving your money untouched, however, CDs often pay higher interest rates than MMAs.

Whether you should choose a CD or an MMA will depend on your financial needs and goals. To help you make the right choice, here’s a closer look at how these two savings options compare.

Main Differences Between Money Market Accounts and CDs

Here’s a quick snapshot of the differences between money market accounts and CDs.

Money Market Accounts

A money market account (MMA) is a type of savings account offered by banks and credit unions that provides some of the conveniences of a checking account. Like a typical savings account, you earn interest on your deposits, often at a higher rate than what you could earn in a traditional savings account. In addition, these accounts typically come with checks and/or a debit card, making it easier to access your funds.

Money market accounts may come with withdrawal limits (such as six or nine per month), however, so they aren’t designed to be used as a replacement for a checking account. MMAs also often require you to keep a certain minimum balance in order to avoid fees or earn the advertised annual percentage yield (APY).

The money you deposit in an MMA is insured up to $250,000 per depositor, per account ownership category, per insured bank by the Federal Deposit Insurance Corporation (FDIC), if held at an FDIC-insured bank, or by the National Credit Union Administration (NCUA), if held at an insured credit union. That means you can’t lose your money (up to certain limits) even if the bank were to go bankrupt or shut its doors.

Pros of Money Market Accounts

Here’s a look at some advantages of opening a money market account.

•   Higher interest rate: Typically, money market accounts have higher interest rates than traditional savings accounts.

•   Secure: Because of the FDIC and NCUA insurance, the funds in a money market are typically insured against loss.

•   Liquid funds: You can withdraw your money when you need to (though you may be limited to a certain number of transactions per month).

•   Ease of access: It’s possible to access the funds in a money market account by withdrawing cash at an ATM, doing an electronic transfer, using a debit card, and/or writing checks.

Cons of Money Market Accounts

MMAs also have some disadvantages. Here are some to keep in mind:

•   Possibility of better rates elsewhere: You may be able to find a high-yield savings account at an online bank that offers a higher APY than an MMA at a traditional bank (with potentially fewer restrictions and/or fees).

•   Minimum balance requirements: Banks often require a minimum deposit to open an MMA as well as a minimum amount you must keep in the account in order to earn the top APY and/or avoid a monthly maintenance fee.

•   Variable interest rate: APYs on MMAs are based on market interest rates at a given time. It’s difficult to predict how the market will perform and whether this interest rate will rise or fall.

•   Limited growth potential: If you’re looking for long-term growth, you can potentially make more by investing your money in the stock market.

Certificates of Deposits (CDs)

A certificate of deposit (CD) is a type of savings account that offers a fixed interest rate that is generally higher than that of a traditional savings account. A CD also comes with a fixed-term length and a fixed maturity date. This means you need to leave the funds in a CD untouched for a set term, which can range anywhere from a few months to several years. Generally, the longer the CD’s term, the higher the APY, but this is not always the case.

CDs don’t charge monthly fees but will typically have an early withdrawal penalty, and you usually can’t add any additional funds after the initial deposit.

CDs are offered by banks and credit unions. At credit unions, they’re often referred to as share certificates. Like regular savings accounts (and as with MMAs), CDs are typically insured by the FDIC or the NCUA, so you get your money back (up to $250,000 per depositor, per account ownership category, per insured bank) in the unlikely event that the bank or credit union were to fail.

Pros of CDs

Here’s a look at some of the advantages that come with depositing money into a CD.

•   Potentially higher rates: CDs tend to offer higher APYs than regular savings accounts and money market accounts.

•   Guaranteed rate of return: Because CDs typically have fixed rates for fixed terms, you know up front how much interest you will earn.

•   Security: Like other types of savings accounts, CDs are insured by either the FDIC or the NCUA.

•   Convenience: It’s fairly straightforward to open a CD, since most banks and credit unions offer them.

Cons of CDs

There are also some disadvantages of CDs that you’ll want to bear in mind:

•   Relatively low returns: While CDs tend to earn more than a regular savings account, investing in stocks and bonds can be a better option if you’re looking to maximize your returns over the long term (though, unlike CDs, returns are not guaranteed).

•   Rates won’t increase: Because CDs come with fixed interest rates, the APY won’t go up even if market rates rise during the term of your CD (unless you open a bump-up CD).

•   No liquidity: Unlike other types of savings accounts, you can’t withdraw funds as needed. To benefit from a CD, you must wait until the CD term ends before you access your cash.

•   Withdrawal penalties: If you end up needing the money before the CD matures, you will likely incur an early withdrawal penalty.

When Should I Consider a Money Market Account or CD Over the Other?

MMAs and CDs have different requirements and benefits, and which one will serve you best will depend on your needs and preferences.

Choosing a Money Market Account Over a CD

A money market account may be a better choice than a CD if:

•   You want the option to add and withdraw money regularly. You can save money over time with a money market account. You can also withdraw the money at any time, though you may be subject to some restrictions.

•   You’re building an emergency fund. A money market account can be a good place to stash your emergency fund. You can likely maintain the minimum balance requirement and can benefit from the extra interest. Should you need the money, however, you can get it right away.

•   You’re saving for a large purchase. If you’re saving for a big-ticket item such as a car, a money market account will allow you to write a check from the account when you’ve reached your goal and it comes time to use those funds.

Choosing a CD Over a Money Market Account

A CD may be a better fit than a money market account if:

•   You have a longer-term savings goal. If you don’t need to use the money for a year or two, you may benefit from the higher returns offered by a CD.

•   You want to make sure you don’t touch the money. If you’re setting aside money for a specific future expense, such as a wedding or a vacation, a CD helps ensure you won’t impulsively spend it on something else.

•   You want some growth with less risk. Unlike money invested in the stock market, the money you put into a CD is insured (up to certain limits), and the rate of return is guaranteed.

Recommended: How to Save Money: 33 Easy Ways

The Takeaway

Both money market accounts and CDs offer safe ways to earn more interest on your savings than you could in a traditional savings account. While money market accounts offer more flexibility and liquidity than CDs, CDs tend to offer higher APYs.

If you won’t need the money for a set period of time (say, six months to three years) and can find a good rate on a CD, you might be better off going with a CD over an MMA. If you may need to tap the funds at some point (but you’re not sure when), an MMA allows you to earn a higher-than-average interest rate while keeping the money liquid, with the added benefit of offering checks or a debit card.

Before choosing any type of savings account, however, it generally pays to shop around and compare current APYs. You may find another savings vehicle, such as a high-yield savings account, that offers the returns you want with minimal requirements, restrictions, or fees.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Are CDs or money markets better?

If you don’t need to access your funds for a while, a certificate of deposit (CD) could be a better fit. CDs tend to offer higher interest rates than money market accounts, and the interest rate is fixed, which makes the return predictable. Conversely, if you might need to draw on the funds in the near term, a money market account (MMA) may be a better option.

What are the tax implications of money market accounts vs. CDs?

With both certificates of deposit (CDs) and money market accounts (MMAs), the interest you earn is considered taxable income. You’ll receive a Form 1099-INT from your bank at the end of the year, which you must report on your tax return.

The interest from CDs is typically taxed in the year it is earned, even if you don’t withdraw it until the CD matures. This means you might owe taxes on interest even if you haven’t received it yet. Interest on money market accounts (MMAs), however, is usually credited monthly and taxed in the year it is credited.

What are other options besides money market accounts and CDs?

Money market accounts and certificates of deposit (CDs) offer a low-risk way to earn a solid interest rate on your money. But they aren’t your only option. Here are some alternatives:

•   High-yield savings accounts. These accounts offer higher interest rates than traditional savings accounts and provide easy access to your funds with no fixed terms.

•   Treasury securities. U.S. Treasury bills, notes, and bonds are government-backed securities. They vary in term length and interest rate and are considered very safe investments.

•   Bond funds. These mutual funds invest in a diversified portfolio of bonds, offering potentially higher returns than money market accounts and CDs, though they come with higher risk.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

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