CD vs. money market account: What’s the difference? #CashNews.co

Certificates of deposit, or CDs, and money market accounts are savings options that offer interest on your deposits, but that’s where the similarities end. Depending on your savings goals and when you need to access your funds, one may be better for you than the other.

If you’re trying to compare a CD and a money market account, here’s what you need to know to decide.

A CD is a time deposit account that offers interest on your balance. In exchange, you’ll typically need to agree to keep your money in the account for a set period ranging from one month to several. In most cases, you also can’t add money to your account after your initial deposit.

If you try to withdraw money before the account matures, you may be charged an early-withdrawal penalty. Once the CD matures, it’ll typically renew automatically for the same period, but you’ll get a week or two to withdraw your funds penalty-free or add more to your balance.

According to the Federal Deposit Insurance Corp., CDs offer average interest rates ranging from 0.26% to 1.59% as of May 2023. Your rate will depend on the financial institution and the CD terms — some banks and credit unions offer CD rates today as high as 5% or more.

Some financial institutions may offer specialty CDs, which come with additional features. For example, you may be able to withdraw your funds early without a penalty, add money to your account after the initial deposit or request a one-time rate increase if market rates go up. These types of CDs typically offer lower rates than standard CDs.

A money market account is a hybrid savings account that mixes the features you can get with a traditional savings account and a checking account and adds an investment component.

Like a savings account, you’ll earn interest on your deposits, and you can freely transfer money to and from the account as needed. And like a checking account, you may be able to write checks or use a linked debit card to make purchases.

Banks and credit unions typically invest money market account funds in low-risk vehicles, including CDs, commercial paper, and Treasury bills. However, they still provide FDIC insurance on your deposits. On average, money market accounts offer 0.59% on deposits, according to recent data from the FDIC. However, it’s possible to find accounts with rates upward of 4% or even 5%.

However, some banks may limit how many times you can transfer or withdraw money from the account each month — ATM withdrawals typically don’t count toward that limit.

If you’re trying to determine whether to put your money in a money market account or a CD, here’s a breakdown of the features to help you compare.

Standard CDs provide very little liquidity, meaning you can’t easily access your funds at any time without a penalty. Depending on your CD term and how much money you put into the account, you may be in trouble if you experience a financial emergency.

In contrast, money market accounts allow you to access your funds any time you want, and you may have a few different ways to do so. If you use the account too often, you may pay a fee for excess withdrawals and transfers.

Both CDs and money market accounts are offered by banks and credit unions.

Money market accounts offer compound interest on your deposits, and you’ll typically see the rate expressed as an annual percentage yield or APY — in most cases, interest is compounded daily and paid monthly, but some financial institutions have other policies.

In some cases, you may need to meet a minimum balance requirement to earn interest, and the APY may be tiered based on how much money you have in the account. Interest rates on a money market account can fluctuate regularly based on current market conditions. If market rates go up, so will yours, but the opposite is also true.

It depends on the financial institution and the CD’s term. Interest is typically compounded daily or monthly, but banks and credit unions usually don’t offer different rates on a tiered system.

Unlike a money market account, a CD allows you to lock in a rate when you open the account and make your deposit. If market rates go up, you’ll miss out on the higher rate unless you have a specialty CD that offers a rate bump feature. But if rates go down, you’ll still enjoy the rate you started with.

If you withdraw money from a CD before it matures, you’ll have to pay a penalty unless you have a no-penalty CD. An example of an early-withdrawal penalty may be 90, 180, or 270 days’ worth of simple interest based on the account’s rate and your balance.

There’s no such penalty with a money market account. But if you exceed the number of withdrawals and transfers set by your financial institution in a month, you may be charged an excess withdrawal penalty. This is usually a flat fee between $5 and $10 for each additional withdrawal or transfer.

If you regularly exceed the financial institution’s limit, it may convert your account to a checking account.

Both money market accounts and CDs are relatively low-risk, so you don’t have to worry about losing as much money as you might with an investment account.

While CDs and money market accounts offer safe returns on your money, they typically don’t offer high enough rates to outpace inflation. As a result, it’s best to diversify your cash holdings to take advantage of different risk-return profiles.

Most money market accounts and CDs are insured up to $250,000 per depositor, per financial institution for each account ownership category. This insurance is provided either by the FDIC or the National Credit Union Administration.

As a result, it’s crucial to ensure the bank or credit union you’re considering is federally insured under one of these programs.

You may opt for a CD over a money market account if any of the following scenarios apply:

• You won’t need access to your money until the CD matures

• You don’t want to make recurring deposits into the account

• You want to avoid the temptation to spend your savings

• You have a large purchase coming up at a specific time

• You have enough money to meet the initial deposit requirement

• You want to lock in a high APY, particularly if you expect market interest rates to go down

Depending on your situation, you may consider a money market account over a CD if any of the following are true:

• You have enough money to meet the minimum balance requirement

• You want to make regular deposits into the account

• You want to earn a high APY but can access your money in several different ways

• You can’t afford to lock up your money for several months or years

• You anticipate that market interest rates are going to increase