What Is the Difference Between Money Market Accounts vs CDs?

By Jacqueline DeMarco · June 18, 2022 · 8 minute read

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What Is the Difference Between Money Market Accounts vs CDs?

Both certificates of deposit (CDs) and money market accounts (MMAs) are low-risk accounts that tend to earn higher interest rates than traditional savings accounts. But the primary difference between a money market account vs. a certificate of deposit is accessibility. An MMA is like a savings account in that you can withdraw money as needed; with a CD, your money is locked up for a period of time.

There are some other differences between a money market account vs. a certificate of deposit, but that’s the main one. Keep reading to learn the difference between these types of deposit accounts and what their pros and cons might be.

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What Is a Money Market Account?

Banks and credit unions offer a type of deposit account known as a money market account (also referred to as money market deposit accounts or money market savings accounts).

Money market accounts function much like regular savings accounts. It’s possible to withdraw funds from a money market account by draft, debit card, or electronic transfer. But MMAs may offer check-writing privileges as well. And like a traditional savings account, the money you deposit in an MMA is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), if held at a bank, or by the National Credit Union Administration (NCUA), if held at a credit union.

Pros of Money Market Accounts

Let’s look at some advantages associated with money market accounts.

•   Security. Because of the FDIC and NCUA insurance the funds in a money market account (up to $250,000) are insured against loss.

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

•   Liquidity. Those looking to keep their money close at hand while still earning interest on it will appreciate how liquid money market funds are compared with other investment vehicles, like a CD.

•   Ease of access. It’s possible to access the funds in a money market account by withdrawing cash, doing an electronic transfer, or even writing checks.

Cons of Money Market Accounts

Of course, there are also some disadvantages that come with money market accounts that are worth keeping in mind.

•   Minimum balance requirements. As mentioned earlier, banks and credit unions often require a minimum deposit to open a checking or savings, and an MMA is no exception. This amount is often higher than the one required for a traditional savings account. And in some cases, it might be necessary to maintain that minimum balance in order to avoid monthly maintenance fees.

•   Limited transactions. Federal banking regulations make it so account holders can’t make more than six withdrawals or transfers a month (typically this restriction applies to checks, debit card payments, wire transfers and other electronic transfers). The transfers you make in person, at an ATM, or via mail, are not restricted. If you exceed the number of allowed transactions per month, you will receive a warning from the bank and may be assessed a fine.

•   Interest rates vary. Saving interest rates can fluctuate as they are based on the overall market’s interest rates at a given time. It’s difficult to predict how the market will perform and if this interest rate will rise or fall.

•   Limited growth potential. Those hoping to experience higher long-term growth can potentially make more by investing their money elsewhere.

What Is a Certificate of Deposit?

A certificate of deposit is another savings vehicle offered by banks, but these products provide less flexibility than a money market account. Typically the funds deposited must remain untouched for a period of time, ranging from a few months to a few years. In exchange for leaving their money in the CD, the institution agrees to pay a higher interest rate.

Thus the money deposited in a CD is typically called the principal, because it is essentially a loan the consumer is offering to the bank. The interest the customer collects is what the bank pays for the privilege of borrowing the money.

If the CD owner decides to withdraw the money early, they will need to pay a withdrawal penalty (except in the case of a no penalty CD).

There are a few different types of CDs available and each come with varying deposit requirements and term lengths that can suit different financial goals.

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Pros of Certificate of Deposits

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

•   Potentially higher rates. CDs can have higher APYs (annual percentage yields) than regular savings accounts or money market accounts. Longer-term CDs usually have even higher interest rates.

•   Fixed rates can provide certainty. Because CDs tend to have fixed rates for fixed terms, the investor knows up front how long their money needs to stay in the CD and how much they will earn.

•   Security. Similar to money market accounts, CDs are either FDIC or NCUA insured.

•   Convenience. It’s fairly easy to open a CD as most banks and credit unions offer them.

Cons of Certificate of Deposits

Of course, there are also some disadvantages of CDs that are good to be aware of.

•   Lower rates than other investments. CDs often offer better interest rates than other deposit accounts, but they don’t usually offer competitive advantages over investments like stocks and bonds that can lead to longer- term growth.

•   Fixed interest rates can be limiting. Because CDs come with fixed interest rates, if the market improves and interest rates go up, the CD owner can be stuck with a lower interest rate until the CD term ends (unless they open a bump-up CD)

•   Withdrawal penalties. More often than not the CD owner has to keep the funds held in the CD until the term ends or they will need to pay an early withdrawal penalty.

•   Limited access. Unlike a money market account or savings account, it’s not possible to access the money in a CD until the term ends.

Where Can You Find Money Market Accounts and CDs?

As previously noted, both CDs and money market accounts are available at banks, credit unions, and select financial institutions.

In many cases you can open either of these accounts online, over the phone, or in person.

Because interest rates vary widely, it’s a good idea to do some research to decide whether you want to open a money market account vs. a certificate of deposit, and which institution has the most favorable terms.

Differences Between a Money Market Account and a Certificate of Deposit

Not sure which type of account is the right fit? These are the main differences to consider when choosing between a money market account vs. a CD.

•   Withdrawals. It’s possible to make withdrawals a month from a money market account (some restrictions can apply), but CD funds are typically unavailable until the end of the term.

•   Interest rates. CDs tend to offer higher interest rates (fixed) than money market accounts (variable).

•   Penalties. One withdrawal from a CD can lead to a penalty, whereas you can typically withdraw money at any point from a money market account (although in some cases, especially with regard to electronic transfers the number may be capped at six withdrawals per month).

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When to Choose a Money Market Account Over a CD

Here’s a brief look at when a money market may be a better choice than a CD.

•   When they require accessibility. Someone who requires more access to their savings will appreciate the flexibility and liquidity that comes with a money market account.

•   When building an emergency fund. A money market account is a great place to earn a little extra interest on an emergency fund that the account holder doesn’t need to access often.

When to Choose a CD Over a Money Market Account

There will be times when a CD is a better fit for a consumer than a money market account.

•   When they have longer term investment goals. If someone wants to earn more money in interest, they’ll find a CD is a better fit thanks to longer terms and higher interest rates.

•   When they won’t miss the money. If the consumer is confident they won’t need to access the funds before the CD term ends, they can earn extra interest in a safer way than investing in stocks.

The Takeaway

Both money market accounts and CDs offer safe ways to earn extra interest on savings compared with a traditional savings account. While money market accounts offer more flexibility and liquidity than CDs, CDs may have higher interest rates.

The main difference between money markets and CDs is that with the former you can access your money virtually any time — and with the latter your funds are unavailable until the CD matures. The length or term of a CD typically ranges from a few months to a few years.

If you’re ready to open a savings account, one easy way is through SoFi’s all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify by setting up direct deposit you can earn a competitive APY.

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Can you lose your money in a money market account?

It’s highly unlikely. Money market accounts at banks are insured by the FDIC, and money market accounts at credit unions are insured by the NCUA (up to a certain amount).

Why would you choose a CD over a money market account?

If you don’t need to access your funds for a while, a 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.

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Photo credit: iStock/Vanessa Nunes

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