Money market accounts and certificates of deposit (CDs) typically offer the highest interest rates among standard bank services
If you want your money to earn the most interest at a bank, you are choosing between two main options: a money market account or a certificate of deposit (CD). Both pay more than a regular savings account, but they work differently and suit different situations.
Money market accounts let you access your money whenever you need it, though with some limits on how often you can withdraw. CDs lock your money away for a set period—anywhere from three months to five years—in exchange for a higher rate. The longer you commit, the higher the rate usually climbs. Right now, CD rates run higher than money market rates at most banks, but that changes based on what the Federal Reserve does with interest rates overall.
The catch: money market accounts come with withdrawal restrictions (typically six per month before fees kick in), and CDs penalize you if you take money out early. If you need access to your cash, a money market account is the better choice even if the rate is slightly lower. If you know you will not touch the money for months or years, a CD almost always wins on rate.
Key Takeaways
- CDs currently pay higher interest rates than money market accounts at most banks, but require you to lock money away for a fixed term.
- Money market accounts pay more than savings accounts and let you withdraw money, though banks limit how often you can do so.
- The longer the CD term, the higher the rate—a five-year CD pays more than a three-month CD at the same bank.
- Online banks and credit unions often pay higher rates than brick-and-mortar banks, so comparing across institutions matters more than comparing account types.
- Early withdrawal penalties on CDs can erase months of interest, so only lock money in a CD if you are certain you will not need it.
How CD rates compare to money market rates
A CD is a contract: you give the bank a sum of money, the bank agrees to pay you a fixed interest rate for a specific period, and you agree not to touch it until that period ends. The bank knows exactly how long it has your money, so it can afford to pay more. Right now, a one-year CD at many banks pays 4% to 5%, while a money market account at the same bank might pay 3.5% to 4.5%.
Money market accounts are more flexible. You can withdraw money without penalty, which means the bank cannot count on having your money for any set time. That flexibility costs you in rate. However, money market accounts still beat regular savings accounts, which often pay less than 1% at traditional banks.
The difference between a CD and a money market account shrinks or widens depending on what the Federal Reserve does. When the Fed raises rates, all three account types go up, but CDs usually climb faster. When rates fall, CDs stay locked at their old rate while money market rates drop immediately.
Why CD term length changes the rate you earn
Banks pay more for longer commitments. A three-month CD might pay 4%, a one-year CD might pay 4.5%, and a five-year CD might pay 5% or higher. The bank is betting that inflation and interest rates will stay relatively stable over that time, so it locks in a rate now. You are betting that you will not need the money and that the rate will be worth the wait.
The relationship is not always linear—sometimes a two-year CD pays almost as much as a five-year CD, or a one-year CD jumps up sharply. This depends on what banks think will happen to rates in the future. If banks expect rates to fall, they offer higher rates on longer terms to lock in customers now. If they expect rates to rise, they keep longer-term rates lower.
The practical result: compare the actual rates at your bank or credit union before deciding on a term. A five-year CD is not automatically better than a one-year CD just because it pays slightly more—if you might need the money in two years, the early withdrawal penalty could wipe out the extra interest.
Online banks and credit unions often beat traditional banks on rate
The bank type matters as much as the account type. Online banks—which have no physical branches and lower overhead—typically pay 0.5% to 1% more than brick-and-mortar banks on both CDs and money market accounts. A CD at an online bank might pay 5% while the same term at a traditional bank pays 4%.
Credit unions also compete aggressively on rates, especially for members who maintain a minimum balance or set up direct deposit. Some credit unions pay rates that rival or beat online banks. The tradeoff is that you have to be a member, which sometimes requires living in a certain area or working for a specific employer.
Before you open a CD or money market account anywhere, check rates at three to five institutions: your current bank, one or two online banks (like Marcus, Ally, or American Express Bank), and a credit union if you are may be able to access. The difference between the highest and lowest rate on a one-year CD can be 0.75% or more, which adds up fast on larger balances.
What happens if you need the money before the CD matures
Early withdrawal penalties on CDs vary widely. Some banks charge three months of interest, others charge six months, and a few charge a flat fee. On a $10,000 CD paying 5% annually, a three-month penalty costs you about $125. On a five-year CD, the penalty might be larger.
Before you open a CD, read the disclosure document and ask the bank directly: what is the early withdrawal penalty, and is it calculated as months of interest or a percentage of the balance? Some banks waive the penalty if you withdraw within a short window after opening the account—usually seven to ten days. That grace period can save you if you change your mind immediately.
Money market accounts do not have early withdrawal penalties, but they do have withdrawal limits. Most banks allow six withdrawals per month before charging a fee (usually $25 to $35 per excess withdrawal). If you need to access your money regularly, a money market account is safer than a CD.
How to choose between a CD and a money market account
Ask yourself one question first: will I need this money in the next year? If yes, use a money market account. If no, a CD almost certainly pays more. Then ask: how long can I leave it untouched? If you can commit to a year or more, compare CD rates across banks. If you might need it in six months to two years, a shorter-term CD (six months or one year) is the middle ground.
For money market accounts, the decision is simpler: shop for the highest rate among banks where you can meet any minimum balance requirement. Most online banks have no minimum or a low one ($1 to $2,500). Money market accounts make sense if you want to earn more than a savings account but need to keep money accessible.
One more consideration: FDIC insurance covers up to $250,000 per account type per bank. If you have more than $250,000, split it across multiple banks or account types to stay fully insured. This applies to both CDs and money market accounts.
Comparing rates across different CD terms
| CD Term | Typical Rate Range (varies by bank) | Best for |
|---|---|---|
| 3 months | 3.5% to 4.5% | Testing the waters; money you might need soon |
| 6 months | 4% to 4.75% | Short-term savings goals |
| 1 year | 4.25% to 5% | Most common choice; good balance of rate and flexibility |
| 2 years | 4% to 5% | Longer commitment; rate may not be much higher than 1-year |
| 5 years | 4.5% to 5.5% | Maximum rate; only if you are certain you will not need the money |
Rates change weekly or even daily, so these ranges are examples only. Check current rates at your bank or online rate comparison sites before opening an account. The highest-paying CD term shifts based on what the Federal Reserve is doing and what banks predict will happen next.
Frequently Asked Questions
Can I withdraw from a CD before it matures without a penalty?
No, not at most banks. Early withdrawal penalties are standard. However, some banks offer a grace period of seven to ten days after opening the CD where you can withdraw without penalty. A few banks offer "no-penalty CDs" that let you withdraw early, but they pay lower rates to offset that flexibility.
What is the difference between a CD and a savings account?
A savings account has no term and no penalty for withdrawal, but it pays much less interest—often under 1% at traditional banks. A CD locks your money for a set period and pays 4% to 5% or more. You trade access for a higher rate.
Should I open multiple CDs with different maturity dates?
Yes, if you want to balance rate and access. This strategy, called "laddering," lets you open a one-year, two-year, and three-year CD at the same time. As each one matures, you can renew it or move the money. You get higher rates than a money market account while having money available every year.
Do I pay taxes on CD interest?
Yes. The bank will send you a 1099-INT form at the end of the year reporting all interest earned. You owe federal income tax on that interest, and possibly state tax depending on where you live. This is true for money market accounts too.
What if rates drop after I open a CD?
You keep your locked-in rate for the full term. This is actually good news—your rate stays the same while new CDs pay less. If rates rise after you open a CD, you are stuck with the lower rate unless you pay the early withdrawal penalty to move the money.