CD or money market? Depends on rate direction

Don TaylorQuestionDear Dr. Don,
I know this is a dumb question, but please tell me the difference between a CD and a money market account.
-- Johanna Juncture

AnswerDear Johanna,
As a college professor, I'll tell you it's true there's no such thing as a dumb question. And there are smart answers. A smart answer to a question promotes understanding. I'll shoot for that goal.

CDs and money market accounts are both "bank products." By that, I mean they are deposit accounts in a bank. The bank determines the interest paid on the accounts and they are FDIC-insured up to the limits of that insurance.

A CD, or certificate of deposit, is a term investment in a bank account. The yield, term, renewal and any penalties for early withdrawal are spelled out in the deposit agreement. CDs sometimes have options attached to them, such as being able to add funds to the account or the ability to increase the yield if interest rates head higher (also known as a step-up provision). CDs also may be callable.

The typical CD is non-negotiable, meaning it can't be sold to another investor. But a brokered CD is a negotiable instrument and can be sold to another investor.

A money market account is not quite a checking account. A checking account is known as a demand deposit account, or a transaction account. The funds are available on demand.

In contrast, an MMA is not a transaction account because it has limitations on the type and frequency of withdrawal and transfer activity you can make each month. The account has no defined term and the interest rate will fluctuate based on market conditions and the bank's management.

If you have no immediate need for the money and the rate on an MMA is comparable to the rate on a CD, I'd choose the MMA in an upward interest rate environment (because of its adjustable rate) and the CD in a downward interest rate environment (because of its fixed rate).

Use Bankrate's compare rates feature to shop rates on CDs and MMAs in your market and nationwide.

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