Certificate of Deposit vs. Money Market Account: What’s the Difference?

There are differences that could make one better for your needs.

Money market accounts and certificates of deposit are both Federal Deposit Insurance Corporation insured savings accounts that offer interest but differ on how accessible your funds will be. Several kinds of CDs make blanket comparisons difficult, and CDs are generally less suitable for funds that are expected to be utilized in the immediate future. Conversely, money market accounts provide penalty-free access to cash within a certain number of monthly transactions. Find out which type of account is right for your financial lifestyle.

Here’s a quick look at what you’ll find in this guide to certificates of deposit versus money market accounts.

What Is a Certificate of Deposit?

CDs are savings vehicles that are frequently used as alternatives to traditional savings accounts. They are not as liquid as cash deposit accounts, as they can often only be accessed after a set maturity date; otherwise, the account holder is likely to incur penalties. The amount of time to maturity is known as the term length, which can range from several days to multiple years.

Like other savings accounts, CDs aren’t volatile and pay periodic interest to account holders. Interest rates tend to be higher for longer-term certificates, but always confirm if the rate is fixed or variable.

See: The Most Rewarding 6-Month CD Rates To Grow Your Money

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What Are the Different Types of CDs?

Different CDs are appropriate for different situations. The different types of CDs include no-penalty CDs, variable-rate CDs, step-up CDs and jumbo CDs. Here’s an explanation of each.

  • No-penalty CDs allow account holders to withdraw funds, often up to the full balance, without incurring a penalty. This increase in liquidity generally requires the account holder to accept lower interest rates.
  • Variable-rate CDs are designed to remove the risk that account holders will miss out on rising interest rates, which is especially relevant for long-term products or times when higher interest rates are forecast. The initial rates paid to holders are lower than comparable fixed products.
  • Step-up CDs are not designed to fluctuate as freely as variable rate products, but they do offer account holders the opportunity to adjust rates if market conditions change. Like variable-rate CDs, the initial rates paid are lower than other comparable fixed products.
  • Jumbo CDs are more appropriate for people with higher sums to invest. They generally pay several more basis points each year with minimum deposits of $100,000.

More About CDsMoney-Making Strategies for Current CD Interest Rates

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Who Is a CD Best For?

CDs typically deliver higher interest rates than more liquid savings accounts, so they provide an obvious benefit for anyone hoping to generate interest income or an asset appreciation with a lack of volatility. This makes sense for someone who has anticipated capital needs in the foreseeable future but not in the immediate time frame.

For example, somebody buying a home or paying college tuition in two years is unlikely to tolerate volatility, but there is still some opportunity cost to capital held in traditional savings accounts due to the relatively low-interest rates on those products.

The illiquidity of CDs usually makes them inappropriate for people with immediate or short-term capital needs, however. Other people who have long-term time horizons, an appetite for volatility and capital growth goals are best served considering other instruments such as equities, mutual funds or exchange-traded funds that have historically delivered stronger growth. These features should be considered when comparing money market accounts versus CDs.

For a Guide to CDs: Investing In Certificates of Deposit: The Ultimate Guide

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What Is a Money Market Account?

Money market accounts are deposit accounts that blend some characteristics of checking and savings banking instruments. Funds in money market accounts generally accrue higher interest rates than simple checking, but they can also be used for transactions such as check writing or debit card purchases.

But there is a catch: Account holders are limited to six transactions per month due to federal Regulation D. These transactions include the transfer of funds in and out of the account. A fine system is put in place to discourage violation of the regulation.

Prospective account holders should be careful to distinguish between these accounts and money market mutual funds, which are actively managed investment vehicles meant to deliver returns with limited risk.

More Comparisons: Money Market Accounts vs. Savings Accounts

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Who Is a Money Market Account Best For?

Money market accounts are not truly serviceable as regular expense accounts, like checking accounts. They are, however, useful options for individuals who want to store emergency funds or arrange for large, planned, nonrecurring expenses, such as tax bills or major purchases. Such a strategy allows the account holder to generate more interest than those funds would yield in checking and with more liquidity than many other short-term accounts.

Additionally, money market accounts do not bear sufficiently high rates to satisfy growth objectives, so capital allocated to the money market should not take the place of capital growth funds. Therefore, a money market account is best for someone looking who is not looking to earn a huge return.

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Money Market vs. Certificate of Deposit

Both products are considered short-term, liquid, low-volatility options for storing capital. They are appropriate for funds that are intended to be accessed within one to two years. Money market accounts and CDs both generate higher rates of return than checking, but neither offers total liquidity in the manner of checking accounts. They are not meant to facilitate regular spending.

Money market accounts and CDs are both known as safe instruments for cash holdings. Neither are exposed to fluctuations in securities markets, and both carry FDIC insurance up to $250,000. The FDIC was established to instill confidence in the banking system, meaning that even accounts at failing banks are backed by a national entity to guarantee those funds for account holders. Therefore, any amount up to $250,000 is essentially only at risk of total systemic economic failure.

Money market accounts are more liquid than most CDs, but for that benefit, holders sacrifice rate of return. Leading online banks can offer 1.5% to 2% annual percentage yield, with comparable CDs from those same online banks generally exceeding those figures by roughly 20 basis points.

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Some people prefer the inaccessibility of a CD because it imposes savings discipline, but this can have obvious pitfalls if unexpected circumstances create meaningful cash needs. Each product also has different fee structures and potentially different minimum balances, and prospective holders should research the specifics for each at the financial institution with which they will do business.

Click through to read more on the best money market accounts of 2020.

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This article has been updated with additional reporting since its original publication.

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About the Author

Jennifer Calonia is a personal finance journalist covering topics about banking, consumer savings, loans and debt. Her features and helpful savings tips encourage and empower households across America to achieve financial balance.