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Money market accounts vs. CDs: Which to choose?

Whether you're saving for your retirement or looking for a safe yet liquid place to keep your money between major investments, money market accounts and certificates of deposit--often called CDs--may both be good choices--but they have key differences.

If you are comparing money market accounts vs. CDs, here are the main differences and why you'd choose one over the other.

Money market accounts offer high interest and security

Available from nearly any bank, money market accounts provide the security and liquidity of traditional savings accounts but usually at a higher average rate. In exchange, money market accounts typically have certain requirements, such as a minimum deposit amount and limits on withdrawals.

Money market accounts are very secure: Like a savings account, they are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per institution.

CDs: safe but locked up

Certificates of deposit are also protected by the FDIC but otherwise differ significantly from money market accounts.

While it's possible to withdraw money from a money market account with no penalty, CDs are locked in for a fixed term--which could be as little as 1 to 6 months or as long as 7 years or more--with penalties if you withdraw before the term is up. Once you fund a CD, you can't pull out your money without a steep penalty.

In money market accounts vs. CDs decision, money market wins for many situations

So which option wins in the contest between money markets vs. CDs? That depends on your circumstances, your need for liquidity and the interest rates offered on each. In general, however, money market accounts are a wiser choice if you aren't absolutely sure that you can leave your cash locked away for a certain amount of time.

What's more, even though you might be tempted to choose a CD for a slightly higher rate when deciding between money market accounts vs. CDs, you may actually be in a better position if you think interest rates will rise in the future.

That's because interest rates on money market accounts fluctuate with the market, while CD rates are locked in when you fund a CD. If interest rates rise, the money market rate will also rise but the CD rate will not (unless you have a special CD with floating terms).

In the comparison between money markets vs. CDs, money market accounts win out for most scenarios. With comparable average interest rates and easier access to your cash, money market accounts come out ahead and are a smart choice for experienced and casual investors alike.

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