Do I Need a Certificate of Deposit or a Money Market Account?

Certificates of deposit (CDs) and money market accounts (MMAs) are types of savings accounts that generate higher yields than regular savings accounts. In exchange for higher interest rates, CDs and MMAs may have higher minimum deposit and balance requirements than ordinary savings accounts.

Both CDs and MMAs are covered by insurance if they're opened at an FDIC-insured bank. That coverage protects the total amount of deposits under your name at each institution, including all checking and savings accounts, up to $250,000.

Apart from these similarities, a CD and an MMA work differently, and they have different rules about how they pay interest and how much access they allow to your money.

How do CDs work?

With a CD, you put in money for a fixed, preset length of time, and that money earns interest until the account reaches its maturity date. Terms for bank CDs generally range from six months to five years. If you want to take money out of the CD before it reaches its maturity date, you'll have to pay a penalty. You can't add to the amount in a CD during its term.

Some CDs pay a fixed rate of return while others pay variable rates. Typically, longer-term CDs pay higher interest rates.

In addition, some CDs roll over automatically — that is, when they mature, they convert to a new CD of the same length of time (with the current rate for that CD type , unless you tell the bank you want to withdraw the money). This compounds your earnings by adding the interest you earned on the first CD to the initial principal of your new CD. Other CDs stop paying interest after the CD reaches maturity, at which point you can either renew the CD or withdraw your money.1

How do MMAs work?

Like a traditional savings account, an MMA allows you to withdraw and deposit money once you open an account. The bonus feature is that, unlike a savings account, an MMA also lets you write a limited number of checks each month.

While the money in an MMA is accessible, it's subject to the same transaction limits that federal banking regulations impose on regular savings accounts.2 That means you can make no more than six transfers or withdrawals per calendar month or four-week statement cycle. Transactions made in person and through an ATM don't count against your limit, but writing checks and making online transfers do.

Additionally, the variable interest rates of MMAs is usually based on a tiered system, with higher rates applying to accounts with higher balances.

Be careful not to confuse money market accounts with money market funds, which are sold by investment companies and other non-bank vendors that aren't FDIC-insured.3