Money market accounts vs. CDs: Which is right for you?
Getty Images/iStockphotoMoney market accounts (MMAs) and certificates of deposit (CDs) are generally considered some of the safest places to park your money — and both are often paying significantly higher rates than they have in years. (See some of the best CD rates you may get now here.)
Money market accounts are a type of FDIC- or NCUA-insured bank account offered by banks and credit unions that may pay higher interest rates than standard savings accounts, though typically less than certificates of deposit. These accounts may come with check writing and debit card options.
CDs, which are also FDIC- or NCUA-insured, are a type of savings vehicle issued by banks or credit unions that have specific, fixed terms with guaranteed returns. But, unlike money market accounts, they’re also typically non-liquid, meaning money can’t be withdrawn from them until they reach maturity, or you will get hit with an early withdrawal penalty typically.
As for which to invest your money in, that depends on the current rate environment, your need for liquidity and more. Here are some of the pros and cons of investing in a money market account vs. a certificate of deposit, with detail on each below.
Pros and cons of investing in certificates of deposit or money market accounts: A quick guide to deciding which is right for you
| Certificates of deposit | Money market account | |
| Interest rates | Often higher than traditional savings and money market accounts | Often higher than traditional savings, but may not be as high as a CD |
| Accessibility | Withdrawals prior to maturity are often subject to penalty | Money can usually be withdrawn without penalty, and check writing capabilities are usually included |
| Minimum balances | Can range from $100 to $1,000 or more | Higher than regular savings, and can be $5,000 or even $10,000 |
| Insurance protection | FDIC/NCUA insured | FDIC/NCUA insured |
Investing in certificates of deposit vs. money market accounts: Pros, cons, and other considerations
As you can see from the above chart, certificates of deposit are generally FDIC- or NCUA-insured up to $250,000 and tend to offer higher rates than money market accounts, but monies in a CD are tied up for a specific term, often ranging between 3 months and 10 years. Indeed, many CDs will make users pay a penalty for withdrawing the money early.
Meanwhile, money market accounts don’t have terms like certificates of deposit, and they provide you easier access to your funds. But money market accounts may offer lower rates than CDs do.
Pros and cons of certificates of deposit
| Pros of CDs | Cons of CDs |
| Generally FDIC- or NCUA-insured up to $250,000 | Monies tend to be tied up for a specific term; early withdrawal penalties may apply |
| Often pay higher interest rates than traditional savings and money market accounts | May pay lower rates, over the long-term, than stocks |
| May be able to lock in a solid, fixed interest rate now | May require a minimum deposit |
See some of the best CD rates you may get now here.
Pros and cons of money market accounts
| Pros of money market accounts | Cons of money market accounts |
| Money can usually be withdrawn without penalty, and check writing capabilities and debit card options are often included | May pay lower rates than CDs |
| Often pay higher rates than traditional savings accounts | May be stricter than a regular checking account in terms of access to money |
| Generally FDIC- or NCUA-insured up to $250,000 | May hit consumers with fees if minimum balances go too low or other requirements are not met |
Minimum deposit requirements for money market accounts
Money market accounts typically have higher minimum deposit requirements than a savings account does, says Greg McBride, chief financial analyst at Bankrate.
“Requirements vary by bank, so it pays to shop around, but some of the best-yielding money market accounts can still be had for minimum deposits of just $100,” says McBride.
Adds certified financial planner Joe Favorito at Landmark Wealth Management: “Minimum deposit requirements are firm-specific, but “most major broker-dealers have very low, or no minimums.”
Meanwhile, certificates of deposit are available with minimum balances ranging from as little as $100 to $1,000.
Withdrawing funds: The terms and conditions
While CD terms range in duration from a few months to 10 years or more, money market accounts are liquid investments, not unlike a savings account. “CDs are time deposits, so withdrawals prior to maturity typically incur an early withdrawal penalty that results in forfeiting a certain amount of interest. If the penalty exceeds the amount of interest that has been earned, you can lose some of your principal so be very sure you can live without the money for the term of the CD,” says McBride.
Money market accounts often allow access to the money whenever it’s needed, but you may be limited to a total of something like 6 transfers or withdrawals per month, so it shouldn’t be viewed as a replacement for your checking account. “Withdrawals in excess of 6 per month can incur a fee and the account can be closed at the bank’s discretion,” says McBride.
(Looking for a new financial adviser? This tool can match you to an adviser who meets your needs.)
Certificates of deposit vs. money market accounts vs. traditional savings accounts
If you’re willing to tie up your money for a while, consider a certificate of deposit over a savings or money market account. Indeed, CDs typically have fixed interest rates that are typically higher than savings and money market accounts (see some of the best CD rates you may get now here); meanwhile, money market accounts and traditional savings accounts have variable interest rates that are typically lower than those offered by CDs.
But if you need to access your money at any time, a money market account or savings account is a better bet. While traditional savings accounts notoriously pay paltry rates in exchange for offering liquidity (monies can be withdrawn from a traditional savings account at any time), money market accounts offer rates somewhere between traditional savings and CDs. They also typically offer check-writing and debiting capabilities, making funds more accessible than CDs.
Interest rate determination for CDs and money market accounts: Factors and insights
CD rates are set by the overall interest rate environment, as well as the desire of the bank to raise cash, among other factors. Generally, banks move in tandem with the Fed and interest rates for many financial products are influenced by the Federal funds rate.
Money market account rates are usually in line with interest rate trends. Note that money market account rates tend to be variable, and may pay more if you have a higher balance.
In the case of both CDs and money market accounts, rates can be lower than the long-term return one gets from stocks. That said, money market accounts and CDs are decidedly less risky.
Maximizing returns in certificates of deposit and money market accounts
As when making any financial decision, shopping around from bank to bank and brokerage firm to brokerage firm is recommended. “Generally speaking, the larger multinational banks will be the worst because they are flushed with cash and don’t need your deposit,” says Favorito.
For investors looking to maximize money market accounts, one strategy is to take advantage of premium money market interest rates for accounts requiring a $100,000 and/or a $1 million dollar minimum. “Dividends received from both MMAs and CDs are fully taxable,” says Bell.
Meanwhile, financial planner Ted Halpern at Halpern Financial says, “Never pay a commission for a money market account. Be sure to ask about liquidity as some limit withdrawals to 1 to 3 per month and others do not at all.”
Tax implications of certificates of deposit vs. money market accounts
Guglielmetti says any interest earned in a bank account will be taxed, unless it’s in an IRA. “For those, money is taxed when withdrawn regardless of whether it’s the original deposit, interest earned or growth on investments,” says certified financial planner Cristina Guglielmetti at Future Perfect Planning. Interest earned on CDs is taxed as income and interest earned on money market accounts is typically subject to federal income tax and possibly state and local taxes, depending on the state.
“Interest income from CDs and MMAs is typically taxable as ordinary income, unless the funds are invested in a municipal bond money market fund,” says certified financial planner Bruce Primeau at Summit Wealth Management. These municipal bonds are typically tax-exempt both at the federal and state level.
Choosing between certificates of deposit and money market accounts
If you don’t have a sufficient emergency fund, forget about certificates of deposit. “Focus on building up your rainy-day emergency savings which can be in a money market account or a savings account. CDs are best suited for a cash need you have at a specific point in the future,” says McBride.
For her part, Guglielmetti says, “Consider your timeline and how you’re planning to fund it. If it’s a definite amount of time and you already have the money, shop around for a CD. If you’re still adding to it, a high yield MMA or savings account might be better.”
Ultimately, choosing between a CD or a money market account comes down to rate and liquidity need. “Typically the CD offers a higher rate for the lack of liquidity, if not, the investor would likely best be served selecting the more liquid MMA, unless rates go down,” says certified financial planner Anthony Ferriera at WorthPointe Wealth Management.
Financial adviser’s role in CD and money market investments
A financial adviser’s role is to help clients determine which products are best based on their unique goals and objectives. “Important considerations when determining whether to go with a CD or MMA include the need for liquidity, downside risk protection and the reputation of the organization or bank offering the investment opportunity,” says Lawrence Bell, certified financial planner at Summit Financial.
“Our role is to help clients work through when the funds are needed and help them invest their liquid assets in the appropriate, corresponding asset,” says Primeau.
Avoid these mistakes when investing in CDs and money market accounts
Avoid overcommitting yourself to a certificate of deposit. “Don’t commit money to a CD longer than you can afford to live without the money, as the early withdrawal penalty may more than offset whatever advantage you had in the CD,” says McBride.
“Don’t assume a no-penalty CD is actually the best option as the yields can be quite a bit lower than what you’d get if splitting the money between a money market account and a CD,” McBride adds. No-penalty CDs allow monies to be withdrawn without penalty, usually 7 days after the CD has been funded.
“Don’t make excessive withdrawals from a money market account as this can result in a fee and an eventual closure of the account if it happens repeatedly,” says McBride.
Don’t neglect checking out high-yield savings accounts as an alternative to money market accounts. Money market accounts may have higher minimum balances, so if you’re looking to put a smaller amount of money somewhere safe, a high-yield savings account can be a better solution. (See some of the highest savings account rates here.)
It’s also important to understand long-term vs. short-term goals and plan where to put your funds accordingly; many people get confused by this. “For your investment account, both stocks and bonds will rise and fall with their own inherent risks, however, it may be important to not expose your savings to as much risk in exchange for a nominally higher interest rate,” says Bell.
(Looking for a new financial adviser? This tool can match you to an adviser who meets your needs.)
CDs and money market accounts vs. stocks and bonds?
A CD and a bond are both debt instruments. “In the case of a CD, you are lending money to the bank. With a bond, you’re lending money to the issuer, either the government or a corporation. In the case of a stock, you’re an actual owner in the company,” says Favorito.
While money market accounts and money market funds sound similar, they’re different in that money market accounts are federally insured bank accounts and the interest varies from bank to bank. Money market funds aren’t federally insured and their returns are based on the investment held within the fund, which tend to be lower rates than those earned in top-yielding money market accounts.
For anyone with a longer time horizon, investing in stocks and bonds can be a better investment than putting money into certificates of deposit or money market accounts. Stocks and bonds are accompanied by bigger risk than certificates of deposit or money market accounts, but diversifying an account with different types of investments as well as holding them for long periods of time can provide returns of about 10%.
Common misconceptions about CDs and money market accounts debunked
Halpern says a big misconception is that when people see a 3-month certificate of deposit paying 5%, they think it’s for the 3 months. “It’s not. It’s an annual percentage. Since this example is for 3 months, then this would mean 1.25% for the 3-month period. The advertising makes it seem better than it is,” says Haplern.
Money market accounts are different than money market funds (MMFs), though people often assume they’re one in the same. Money market accounts are FDIC- or NCUA-insured and money market funds are uninsured investments in mutual funds. Money market mutual funds are low-risk mutual funds that blend monies from several investors into various investment accounts and generally have higher returns than money market accounts.
