4 Key Differences Between CDs and Money Market Accounts

Looking for a place to rest your money, either for a short time or for a long while? If high-yield savings accounts aren't what you're looking for, other options for you might be either certificates of deposit (CDs) or money market accounts (MMAs). Each has its own advantages and disadvantages, and people who they will work best for. Let's walk through the key differences between these two types of savings vehicles.

1. Access to funds

For some savers, the most important difference between CDs and MMAs is that one makes it very easy to access your money, and the other, not so much. A CD essentially locks your money in for a set period of time, but money market accounts do not.

In fact, MMAs act more like savings accounts than investments, since you can easily access your funds when you need them (some even come with debit cards), and you can put more money into these accounts as you please.

MMAs are great for people who aren't 100% certain they won't need to access their savings or who are trying to meet an active savings goal and will need to add more money over time.

2. Lock-in terms

CDs are well known for having a lock-in period, during which time you're not supposed to access your money at all. You can't add or subtract from your savings, it's locked in and you're being paid a set interest rate for not touching it over the long term.

CD terms can vary from mere months to several years, depending on which one you choose, with the bulk of the best CD rates currently available on accounts with terms of six to 18 months.

MMAs, on the other hand, don't have set terms, and you can open, close, add, or subtract from them as you see fit, as long as you understand that changes can affect the interest rate you'll be paid.

3. Early withdrawal penalties

As mentioned above, MMAs don't have set terms, and due to that, don't have penalties for early withdrawals. This can be a huge benefit to someone who isn't positive that they can leave their money without touching it through a set term.

With CDs, you agree to leave your money in the bank for a set period of time, and if you don't, you will be penalized financially. How stiff the penalty is depends on how long your term is for and how early in it that you withdraw your money. It usually comes in the form of forfeited interest, which can be significant.

4. Interest rate variability

One last huge difference between CDs and MMAs is their interest rate variabilities. Right now, CD and money market interest rates are very similar, but one is a fixed interest rate and the other is variable.

CDs offer savers a guaranteed return over a set period, and everything is very neat and tied up with a little bow. They have fixed interest rates -- but MMAs do not. In fact, MMAs can have highly variable interest rates if the environment is volatile, but this can work for or against you, depending on which direction rates are moving.

If interest rates are going up, an MMA will get you a higher return faster compared to a CD because its interest rate is likely to also go up. If interest rates are falling, your CD will still have the same guaranteed payout for the lock-in period, where an MMA will have a falling interest rate.

Certificates of deposit or money market accounts?

There's no definitive answer as to which is a better investment vehicle in the CDs versus MMAs debate. CDs are good for some people, in some situations, and MMAs are good for others, in other situations.

If I were to try to paint this with a really broad brush, I'd say that a CD would be fitting for you if you were trying to earn extra interest on money you absolutely knew you'd not be touching, like money for a far-off vacation or event or to pay for future school tuition for yourself or your children. Money that's essentially already spent is money you won't touch and you might as well earn some extra cash on it while you wait to pay the bill.

MMAs, on the other hand, are great for people who want to continuously earn a higher interest rate than their savings is likely offering, but who also know, realistically, that they may have to pull some of that money out at some point. This is a great place to put your future home down payment money, or back-up savings for specific expenses, like medical bills that you won't need to pay out often.

No matter which you choose, be sure that you read all the documentation that your bank provides, understand any fees or minimums that might be required for your accounts, and ensure that you're honest with yourself about how often you think you may need to access your funds. Those factors will help guide your way.