Certificate of deposit vs. money market account: How do they compare?
Editorial staff, J.P. Morgan Wealth Management
- CDs often offer competitive (usually fixed) interest rates in exchange for securing your money for a set term.
- MMAs may offer competitive interest rates and may include other savings account-like features, depending on the institution.
- Deciding where to save your money will depend on your circumstances and financial goals.
If you're new to saving money, one of the unwritten rules you'll discover is that you should make your money work for you. In other words, it pays to save your money in an account that earns interest on the principal balance. The question is: Which type of account is best for you?
Two popular alternatives to traditional savings accounts are certificates of deposit (CDs) and money market accounts (MMAs). Although both are interest-earning deposit accounts, they actually differ when it comes to withdrawal flexibility and other account features.
To help you choose the best product for your financial goals, here’s what you need to know when it comes to the CD vs. MMA debate.
What is the difference between CDs and MMAs?
While CDs and MMAs are both known savings tools, they have several differences worth noting.
Certificate of deposit (CD) vs. money market account (MMA)
Certificate of deposit (CD) | Money market account (MMA) |
|---|---|
Ideal usage | |
Money you can set aside until a chosen maturity date (e.g., to save for a down payment on a home). | Easy access and/or short-term cash reserves (e.g., an emergency fund). |
Interest rate | |
Often fixed for the term (though some CDs may have variable rates). | Usually variable and can change at any time; rates vary by institution. |
Is it insured? | |
Yes, up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. | Yes, up to $250,000 per depositor by the FDIC for banks or the NCUA for credit unions. |
Can you add money? | |
Generally no during the term (some add-on CDs allow it). You can typically add money when you renew at maturity. |
Yes.
|
Can you withdraw money? | |
Yes, but you will incur a penalty if you withdraw before the end of the agreed-upon term, with the exception of some no-penalty (or “liquid”) CDs.
|
Yes, but institutions may limit certain withdrawals/transfers and may charge fees if you exceed limits.
|
When are fees incurred? | |
If you withdraw funds before the end of the term length. | Monthly service fees may apply; fees may also apply if you exceed transaction limits or fall below minimum balance requirements. |
Now that you know the high-level differences between CDs and MMAs, it’s time to get into the details of each to help determine which one will best serve your financial needs.
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What is a CD?
A CD is a time deposit account. This means that when you open a CD, your money is locked up for a specific term of your choice, anywhere from a few months to several years, depending on the terms offered by your financial institution. In exchange, your financial institution pays an interest rate set for the term, so you can estimate what you’ll earn by maturity. In general, longer-term CDs pay higher interest rates.
The main draw is that a CD earns interest at a fixed rate for the term of the account regardless of changes in the rate environment during the term, so you don’t have to worry about rate fluctuations. In general, CD rates may offer a higher APY than the rates for savings and MMAs because you usually can’t make withdrawals before the account matures.
The downside is that if you need to access the money before maturity, you’ll have to pay a significant penalty for early withdrawal.
In short, CDs can be a predictable way to save money and earn interest on the principal in the account. As always, please speak with a tax professional for any questions related to the taxable income from CDs and MMAs.
Pros and cons of a CD
Here’s a more detailed breakdown of the pros and cons of CDs to help you decide if it’s a good move for you.
Pros
- Competitive rates: Depending on the type of account, a CD can yield a higher interest rate than other traditional savings accounts.
- Money is insured: Funds in CD accounts are insured up to $250,000 per depositor by the FDIC or NCUA.
- Predictable returns: In contrast with other savings options, CDs offer predictable interest earnings on the funds you put in. You set aside a specific amount of money at a fixed rate for a set amount of time, and you don’t have to worry about market performance.
Cons
- Early withdrawal penalty: The money in a CD must stay locked up for a set period and can only be withdrawn at maturity; otherwise, you’ll incur a significant early withdrawal penalty.
- Renewals: Your bank may inform you when your CD term is about to mature. But if you miss taking action at maturity, your account may automatically renew under the same terms. This means you may not be able to increase the deposit amount or change to a different term once the renewed term begins. Be sure to review the renewal terms provided by your financial institution.
What is an MMA?
An MMA is a deposit account that earns interest at a rate that the bank or credit union can change at any time after the account is opened. MMAs generally allow unlimited deposits and may permit a limited number of withdrawals or transfers, including check-writing capabilities, within an established time frame (e.g., per month or statement cycle). They may also allow account access via an ATM, debit card or in person at a branch of the financial institution.
Pros and cons of MMAs
To help you decide if an MMA is right for you, here’s a look at some of its pros and cons.
Pros
- Liquidity: You can generally access funds easily, though transaction limits may apply.
- Overdraft protection: At some institutions, automatic transfers can be established to provide overdraft protection for your checking, while your other funds continue to earn competitive rates.
- Competitive rates: In some cases, the annual percentage yield (APY) may be higher than the APY on traditional savings accounts. Some banks pay interest based on the balance in the account (i.e., the higher the balance, the higher the rate). However, rates vary by institution and can change over time, and some high-yield savings accounts may offer higher rates than MMAs.
- Access to ATM cards: In some cases, banks or credit unions will give you an ATM card to access funds from your MMA.
- Money is insured: Funds in MMAs are insured up to $250,000 per depositor by the FDIC for bank accounts or the NCUA for credit union accounts.
Cons
- Limit on transfers: The number of transfers, including check-writing as applicable, per month or statement cycle may be limited. Transfers beyond the limit may be subject to a fee.
- Variable rates: Rates are variable, meaning they can change at any time after the account is opened, depending on the current rate environment and market conditions.
- Balance requirements: You may be required to open the account with a high minimum deposit and/or maintain a minimum balance on the account to earn interest or to avoid monthly service fees. Be sure to check with your financial institution for specific terms.
The bottom line
When deciding which savings method to go with, think about the benefits of each type and consider which one best aligns with your needs. Are you comfortable with setting aside money for a period of time to allow it to grow? If so, a CD may be a better fit. But if you prefer to have immediate access to your savings for unforeseen circumstances or needs, then an MMA may be a better fit.
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Editorial staff, J.P. Morgan Wealth Management
