If you have money set aside and are wondering where to put it to earn interest, two options are money market accounts, known as MMAs, and certificates of deposit, or CDs. Both of these bank account types offer safe ways to earn competitive interest on your deposit. However, each works differently.
Before you decide where to put your money, it’s helpful to understand the differences between money market accounts and CDs and which one best fits your needs.
What Is a Money Market Account?
Not to be confused with a money market mutual fund, a money market account is a type of deposit account offered by most banks and credit unions. It’s fully liquid, meaning account holders can access their funds at any time, though there may be restrictions on the number of withdrawals allowed per month.
Money markets typically earn higher interest than regular savings accounts and offer some of the conveniences of checking accounts, says Luis Arreola, an assistant vice president at Neighborhood Credit Union. Typically, he adds, money market accounts are tiered so that account holders earn higher rates based on their balance. Rates are also variable and can fluctuate with changes to interest rates and market conditions.
[Read: Best Money Market Accounts.]
What Is a Certificate of Deposit?
A certificate of deposit is another type of deposit account in which the account holder agrees to leave her money on deposit for a set term, at a set interest rate.?
“It allows the member to earn a higher interest rate than savings accounts as an incentive on larger account balances that are deposited for longer time periods,” Arreola says. “The main draw is that a CD earns a fixed interest rate for the term of the account, regardless of the rate environment during the term, so you don’t have to worry about rate fluctuation.”
It’s important to note that if you pull out your money from a CD before the maturity date, you’ll be charged an early withdrawal fee. Some banks may penalize you 90 days worth of simple interest for CD terms under one year and 180 days worth of simple interest for terms longer than one year, according to Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
“Federal law requires a minimum penalty on early withdrawals from CDs, but sets no maximum penalty,” he says.
[Read: Best CD Rates.]
Money Market vs. CD: How Do They Compare?
Money market accounts and CDs are both types of interest-bearing deposit accounts offered by banks and credit unions. There’s no risk to your principal as long as the account is held at an institution insured by Federal Deposit Insurance Corporation or National Credit Union Administration and doesn’t exceed protection limits.
However, there are some key differences between the two. Consider these three factors when deciding which type of account to choose.
Liquidity
Money market accounts offer greater liquidity than CDs, as you can usually access your funds at any time without penalty. CDs, on the other hand, have a fixed term (ranging from a few months to several years), and generally don’t let you access your money before the term is up without incurring an early withdrawal penalty.
Interest Rates
CDs typically offer higher interest rates than MMAs because you commit to keeping your money in the account for a specific period. A longer term will likely have a higher interest rate . Money market account interest rates tend to be higher than traditional savings accounts, but lower than CDs. They are variable and can change over time based on market conditions.
Minimum Deposits
CDs often have a minimum deposit requirement, though it can be as little as $1 at some institutions. CDs with high interest rates may require larger minimum deposits. Money market accounts may also have a minimum deposit requirement, though some institutions offer MMAs with no minimum deposit required.
Here’s a closer look at the major differences between money market accounts and CDs.
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When Is a Money Market Account a Better Fit?
One of the main draws of a money market account is that you can earn more interest than with a traditional savings account, but still maintain liquidity and avoid market risk.
“If you seek easy access to your money and want to be able to write checks or make withdrawals, a money market account might be a better choice,” Schulman says.
When Is a CD a Better Fit?
Depositors looking for the highest interest rates available may want to consider a CD.
“If you have a lump sum of money that you won’t need for a specific period and you’re comfortable with locking in your funds for a set term, a CD might offer a better return,” Schulman says.
And if you find that both money market accounts and CDs come with more restrictions than you’d like, it may be worth considering a traditional savings account instead.
Even though the national average savings account rate is quite low at 0.39%, according to the FDIC, there are plenty of high-yield savings accounts available. Many are currently paying around 4% and don’t have any balance requirements or fees.
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Money Market Accounts vs. CDs: What’s the Difference? originally appeared on usnews.com
Update 02/06/26: This story was previously published at an earlier date and has been updated with new information.