Picking the right type of savings vehicle has a huge impact on how much your money can grow over time. As you weigh your options, be sure to compare two popular types of accounts: a certificate of deposit and a money market account. Both are designed for larger savings balances, but are structured differently to benefit you in distinct ways.
Learn more about both CDs and money market accounts to see which one is the most advantageous for your savings. A quick comparison is the best way to make a smart money move and maximize your passive earnings.
Overview of CDs and Money Market Accounts
Before looking at a complete head-to-head of which type of savings vehicle is better, first take a quick look at how both a certificate of deposit and a money market account actually operate.
Certificates of Deposit
A certificate of deposit is a savings vehicle that comes with a set maturity date. That means after you deposit your money, you can’t access your funds until the CD matures. You can pick a CD that lasts anywhere from one month to five years. The longer the term is, the higher interest rate you’ll earn.
You can open a certificate of deposit at banks, credit unions, and online financial institutions. Note that at a credit union, this type of account is called a share certificate. Once you deposit funds into a CD, you’ll start earning interest.
If you want to withdraw money from the account before the term is over, you’ll be charged an early withdrawal penalty. This is usually assessed as a percentage of the interest you’ve already earned on your deposit amount.
When your CD does reach maturity, you can either roll it into another CD, transfer the funds (including earnings) into a traditional bank account, or withdraw your funds by receiving a check.
Money Market Accounts
A money market account is similar to a savings account except that you can only make up to six withdrawals a month. Unlike a savings account, you usually get a checkbook and a debit card attached to the account. This makes it easy to quickly access your funds, despite being limited in how often you may do so.
Because money market accounts usually come with higher APYs, they also come with higher opening deposits and minimum balances. Not only do you need more cash to open the account, you usually need to keep a similar amount in there as well, otherwise you’ll be assessed a fee by your bank.
This feature can also impact how frequently and how much you withdraw funds from your money market account. If you’re actively depositing more funds on a regular basis as part of your savings strategy, however, this may not impact you as much.
Clearly, CDs and money market accounts are designed very differently. But there are some overlaps as well. Here are a few similarities you’ll find regardless of which product you choose for your savings.
The yield on your account differs from bank to bank, but typically money market accounts and longer-term CDs have a higher APY than most traditional savings accounts. In most cases, interest compounds daily and is applied to your account monthly, allowing you to watch your balance grow.
A CD’s APY is determined by the term length and deposit amount. When evaluating money market accounts, find out how long the higher APY lasts. Sometimes it may just be a promotional period or it could drop to a lower rate if your balance drops below a certain threshold.
Larger Balance Requirement
In order to get the best rate with either product, you’ll need a larger deposit amount. On the lowest end, expect to make an opening deposit of at least $1,000 to $2,500. In some cases, you may need a deposit as high as $10,000 depending on how high of a rate you hope to receive from either the CD or money market account.
If you do have a large amount of money to deposit, you can also explore a jumbo CD or a jumbo money market account. You usually need at least $100,000 to qualify for either type of account.
Both CDs and money market accounts are low-risk options for your money. This accounts for their lower APY compared to riskier investment options like stocks or mutual funds. When you open a CD or money market account at a bank, your funds are FDIC-insured up to $250,000. You get the same level of protection at credit unions as well, with the only difference being that your funds are insured by the NCUA rather than the FDIC.
A final similarity between CDs and money market accounts is that your earnings from each type of account are considered taxable income each year. You’ll receive a statement from your bank each year before tax season outlining how much interest you’ve earned from your various accounts. If the total is more than $10, you must report it to the IRS.
While there are quite a few similarities between CDs and money market accounts, there are some pretty significant differences as well. Here’s what to expect from each one.
CDs and money market accounts both have limitations when it comes to making withdrawals. With a CD, however, you can only access your funds when the certificate reaches maturity. If you open a long-term CD in order to take advantage of the best rates, that could tie up your money for as long as five years, unless you take a penalty before then.
A money market account allows you access to your money at any point, but federal law limits you to just six withdrawals each month. This isn’t the type of account to use for frequent withdrawals, or you could be charged a fee by your bank, have your transaction declined, or eventually have your MMA switched to a checking account.
Another important distinction between these two accounts is how new contributions are made. With a money market account, you can deposit additional funds as frequently as you’d like. Once you open a CD, on the other hand, you can’t make any new deposits. Your only choice would be to open a new CD for the new funds.
When to Pick a CD
A CD is a smart option if you have additional emergency funds available in a separate account and are comfortable not touching your CD funds for the entire term. Maybe you have money saved up for a down payment but won’t be ready to buy a home for another year. Or perhaps you’re planning a wedding further down the road. A CD can help you get the highest rate in a very low-risk vehicle on those savings you’ve earmarked for a specific purpose.
If you like the rates and structure of a CD, you can also consider creating a CD ladder. This involves staggering your term lengths so that eventually you have one CD maturing every year. It gives you more flexibility because you gain penalty-free access to your money every 12 months so you can choose whether you need extra cash that year or want to roll over the funds again.
When to Pick a Money Market Account
A money market account is ideal when you have a large enough deposit available to take advantage of the highest APY. It’s also a smart choice if you plan to continually contribute to your savings account, either for a specific purpose or for general savings. You can either manually transfer money into your account or set up automated transfers from your checking account each month.
Using a money market account as your emergency fund is also a good choice because you can quickly use your cash by writing a check, using a debit card, or going to the ATM. Since you’re limited to six withdrawals each month, you won’t be tempted to take out funds so frequently. Instead, you can place some structure around how you truly plan to use that money. This is especially important if you don’t make regular contributions, since you’ll need to stay above your minimum balance threshold in order to keep earning that higher APY.
The Bottom Line
Both a certificate of deposit and a money market account can help you earn more interest on higher balances. The main question is how much you have to deposit and how often you plan on withdrawing funds from your account.
Once you have a specific use in mind for the money you want to deposit, you can focus on opening deposit minimums and APYs. Those two numbers shed light on how much cash you need upfront to qualify, and how much you can expect to earn in the coming months and years. With that information, you’ll likely have a pretty clear picture on whether a certificate of deposit or money market account is the best choice for your own savings strategy.