Money market accounts and certificates of deposit are generally considered some of the safest places to park your money — and both are often paying significantly higher rates than they have in years.
Pros and cons of investing in certificates of deposit or money market accounts: A quick guide to deciding which is right for youInvesting in certificates of deposit vs. money market accounts: Pros, cons, and other considerations As you can see from the above chart, certificates of deposit are generally FDIC- or NCUA-insured up to $250,000 and tend to offer higher rates than money market accounts, but monies in a CD are tied up for a specific term, often ranging between 3 months and 10 years.
Meanwhile, certificates of deposit are available with minimum balances ranging from as little as $100 to $1,000. But if you need to access your money at any time, a money market account or savings account is a better bet. While traditional savings accounts notoriously pay paltry rates in exchange for offering liquidity , money market accounts offer rates somewhere between traditional savings and CDs. They also typically offer check-writing and debiting capabilities, making funds more accessible than CDs.
Maximizing returns in certificates of deposit and money market accounts As when making any financial decision, shopping around from bank to bank and brokerage firm to brokerage firm is recommended. “Generally speaking, the larger multinational banks will be the worst because they are flushed with cash and don’t need your deposit,” says Favorito.
“Interest income from CDs and MMAs is typically taxable as ordinary income, unless the funds are invested in a municipal bond money market fund,” says certified financial planner Bruce Primeau at Summit Wealth Management. These municipal bonds are typically tax-exempt both at the federal and state level.
Financial adviser’s role in CD and money market investments A financial adviser’s role is to help clients determine which products are best based on their unique goals and objectives. “Important considerations when determining whether to go with a CD or MMA include the need for liquidity, downside risk protection and the reputation of the organization or bank offering the investment opportunity,” says Lawrence Bell, certified financial planner at Summit Financial.
“Don’t make excessive withdrawals from a money market account as this can result in a fee and an eventual closure of the account if it happens repeatedly,” says McBride.