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What is the difference between a CD and a Money Market Account?

What is the difference between a CD and a Money Market Account?


A CD (short for Certificate of Deposit) is what bankers call a "time deposit." It's a deposit that will be left with the bank for an agreed-upon period of time, such as thirty days, six months, a year, three years, etc. The bank is not required to allow withdrawals from the account before the end of the contract period, but many (perhaps most) banks will permit early withdrawals, but impose a penalty. The penalty may be as little as a week's interest or as much as several months's interest on the amount withdrawn.

Things to ask about if you are thinking about putting money in a CD:
  • Obviously, compare rates available at several institutions. Look for the Annual Percentage Yield (APY) that the bank advertises for the term in which you are interested.

  • Ask whether the bank will allow early withdrawals, and what the penalty will be.

    Find out if there are any circumstances under which the bank will waive its penalty. Since these usually involve the death or incompetence of an account owner, the answers might not affect you, but they could affect your family.

  • Some banks will allow you to withdraw any accumulated interest on the account without penalty. Ask about this, just in case.

  • Find out if the account will automatically "roll over" (renew) for a similar period when it matures, and whether you get a "grace period" to withdraw from the account after it rolls over.
A Money Market account is a savings or investment account that generally pays a higher rate than a conventional savings account or NOW account. Many banks offer tiered interest rates on these accounts, which means that they pay higher rates on higher balances. You'll want to know about current rates and the range of balances that apply to each rate. Often, Money Market accounts permit limited transaction capabilities. For example, some of these account will have check-writing access, but you will be limited to writing three checks to third parties each month. You may also be able to transfer funds between your checking/NOW account and a money market account, but transfers from the money market account will be limited each month, too. Usually, if you make these transfers at the bank itself or at an ATM, the limits won't apply. Because banks may design their accounts differently, it's very important that you find out exactly what the transaction restrictions are before opening a money market account.

There's no contract to keep funds on deposit for a specific period when you open a Money Market account, so there are no penalties for withdrawals (unless you exceed the transaction limits, when many banks will impose a fee). Usually, CD rates will be a little higher than money market rates for the same dollar amounts, but the money market account gives you easier access to your money. If you explain your needs and questions to your bankers, they can help you select the account that best suits your situation.

Published on 9/13/06