What Is The Difference Between Money Market Accounts and CD Accounts?

Written by

Joe Taylor

Updated by

Kristin Marino

Savings accounts, money market accounts, and certificates of deposit are different savings vehicles that can help you manage the liquid funds in your portfolio.

It’s important to choose the right kind of account for your financial needs and lifestyle, though. Picking the wrong account can lead to lackluster dividends, inconvenient access restrictions and hefty fees.

It’s not hard to decide which is right for you. All you need to know is what types of accounts are available, how they help you and how they differ.

Savings accounts: Lower interest, higher flexibility

A savings account may have been the first type of bank account you opened as a child. Consequently, you may still think basic savings accounts are for kids, offering meager returns and little excitement. But they have a definite, intermediate role to play between a checking account that you might access on a daily basis and a long-term retirement account which you shouldn’t touch for many years.

What to use a savings account for:

• Getting started with savings
• Saving for emergencies
• Building funds for large purchases

Traditional vs. online savings accounts

Interest rates fluctuate along with the economy and may be quite low for traditional savings accounts. However, a traditional account may work best for you if you prefer to work directly with your banker, your transactions are primarily cash-based, or you’re simply uncomfortable with online or mobile transactions.

An alternative to the traditional savings account is a high-yield savings account that is online-based. Generally speaking, online savings accounts offer higher interest rates than branch-based savings accounts. In fact, according to the most recent America’s Best Rates survey, “all of the top 10 savings account interest rates were for online accounts.”

How to open a new savings account

Opening a traditional savings account is not difficult, but it requires you to visit a branch to provide personal information and identification and also to deposit or transfer funds for your opening balance.

An online savings account is easy to open too. You typically complete an online form to provide the same personal information and identification, but you link to an existing account to transfer your opening balance electronically. Here’s an example of the information you may be required to provide:

• Name, address, date of birth
• Driver’s license and Social Security number
• Email address, correct routing number and account number for your linked account

Check to see that your bank is insured by the Federal Deposit Insurance Corporation (FDIC) – or the National Credit Union Administration (NCUA) for credit unions – before opening an account. If insured, these accounts are protected up to $250,000 per customer, per institution.

Money market accounts: Higher interest rates, higher minimums

A money market account (MMA) is a savings vehicle that may offer higher interest rates and more convenient access to your funds than a savings account.

The best money market account may include check-writing privileges or an ATM card, but that may depend on your bank and state of residence. The number of checks and other types of withdrawals allowed per month are limited by federal law, so don’t expect to use your money market account like a checking account.

What to use a money market account for:

• Larger emergency funds
• Holding cash in between investment opportunities
• Building wealth for retirement

Money market accounts vs. money market funds

New savers may confuse the money market accounts offered by banks and credit unions with the money market funds offered by brokerages. Although both leverage the power of short-term investments to generate higher interest rates, only money market accounts from chartered banks carry FDIC insurance, which protects up to $250,000 in deposits per customer, per institution.

Conversely, like other mutual funds in your portfolio, a money market fund may fluctuate in value and lose money over time. Therefore, if security is paramount, be sure to verify with your bank that your deposits are going to be held in a money market account and not a money market fund.

Shop for the best rates and account terms

Money market accounts may offer higher interest rates than savings accounts, but minimum balance requirements and other restrictions could offset or negate those gains. To counteract, consumers can actively shop for higher rates and better account terms.

MoneyRates monitors rates and account terms every week to help consumers in their search. When it comes to higher money market rates, search for banks that consistently push the trend toward high interest rates. When it comes to account terms, compare minimum opening deposits, monthly minimum balances and monthly maintenance fees.

Certificates of deposit: Higher rates, longer commitments

A certificate of deposit is another low-risk savings vehicle that pays a certain interest rate in return for your commitment to keep your funds on deposit for a longer period of time. Generally speaking, the more you invest, and the longer you keep it invested, the better your return. Common term lengths range from one month to five years.

Banks offer higher rates of return on CDs to attract long-term investors. When a bank knows that it does not have to cash out a CD for one, three or five years, it can use those deposits more aggressively to fund longer term investments. Taking an early withdrawal from your certificate of deposit is possible, but it typically triggers a penalty.

What to use a CD for

• Long-term, high-interest savings
• Future down payment
• Building wealth for college, retirement

Adding flexibility to your CD investments

If you would like to have some access to your money periodically, consider using a CD laddering technique to leverage the best CD rates without sacrificing liquidity.

Using a five-year time horizon, you can stagger the terms of your certificates to mature every three, six or 12 months. This way, some portion of your savings is always accessible to you on a quarterly basis. You can then choose to cash out your certificate or roll it over into a new, longer term certificate. This strategy requires a higher degree of organization and record-keeping than a high-yield savings account; but over time, it may net you significantly higher dividends.

Savings accounts vs. money market accounts vs. CDs – feature summary