When you want to keep cash safe but still earn something on it, three products usually come up: high-yield savings accounts, money market accounts and certificates of deposit (CDs). A fourth, the money market mutual fund, often gets confused with the second. They can look similar on a rate comparison table, but they differ in how you access your money, how the rate behaves and, importantly, how your money is protected. This guide explains each one in plain terms so you can match the product to the job.
The short version
| Feature | High-yield savings | Money market deposit account | Certificate of deposit | Money market mutual fund |
|---|---|---|---|---|
| Where you get it | Bank or credit union | Bank or credit union | Bank, credit union or brokerage | Brokerage or fund company |
| Type | Deposit | Deposit | Deposit | Investment (mutual fund) |
| Government insurance | FDIC or NCUA, up to limits | FDIC or NCUA, up to limits | FDIC or NCUA, up to limits | Not FDIC-insured |
| Rate | Variable | Variable, sometimes tiered | Fixed for the term (usually) | Variable, reflects short-term market yields |
| Access | Transfers anytime | Transfers; often checks or a debit card | Locked until maturity, or pay a penalty | Sell shares, typically settles in a day or so |
| Best for | Emergency funds, short-term goals | Emergency funds with occasional check-writing | Money you will not need for a set period | Cash held inside an investment account |
High-yield savings accounts
A high-yield savings account is a regular savings account that pays a higher interest rate than the national average, often because it is offered by an online bank with lower overhead. The rate is variable: the bank can raise or lower it at any time, and rates across the industry tend to move with the Federal Reserve’s policy rate.
Many people still assume savings accounts are limited to six withdrawals a month. That limit came from the Federal Reserve’s Regulation D. In April 2020, the Fed issued an interim final rule deleting the six-per-month limit from the regulation’s definition of savings deposits. However, banks are still allowed to set their own limits, and some do, so check your account agreement.
Strengths: easy access, insured, no lock-up. Weaknesses: the rate can fall without notice, and some accounts require a linked external checking account for transfers.
Money market deposit accounts
A money market deposit account (MMDA), usually just called a money market account, is a bank or credit union deposit account that combines features of savings and checking. Many offer limited check-writing or a debit card. Rates are variable and may be tiered, paying more on higher balances. Some require a higher minimum balance than a savings account to earn the advertised rate or avoid a fee.
Because MMDAs are deposit accounts, the FDIC lists them among the products it insures when held at an FDIC-insured bank, just like savings accounts and CDs. Credit union versions are covered by the NCUA.
Money market mutual funds: a different animal
A money market fund is a type of mutual fund, sold by brokerages and fund companies, that invests in short-term, high-quality debt such as Treasury bills and commercial paper. Many investors use them as a place to hold cash in an investment account. According to the SEC’s Investor.gov, mutual funds, including money market funds, are not guaranteed or insured by the FDIC or any other government agency, and it is possible to lose money. Money market funds are designed to be stable and are tightly regulated, and brokerage accounts may carry SIPC protection, but SIPC covers missing assets if a brokerage firm fails, not declines in investment value.
The similar names cause real confusion. When you see “money market,” ask one question: is this a deposit at a bank, or shares of a fund? The answer determines your protection.
Certificates of deposit
A CD is a time deposit. You agree to leave a fixed amount with the bank for a set term, commonly from three months to five years, and in return the bank usually pays a fixed rate for the whole term. If you withdraw early, you typically pay a penalty, often expressed as a number of months of interest. The penalty is disclosed in the account terms, so read it before you open the CD.
A few variations to know:
- No-penalty CDs let you withdraw after an initial period without a penalty, usually at a lower rate than a traditional CD.
- Brokered CDs are bought through a brokerage account. Investor.gov notes that deposit brokers are not licensed or approved by any federal or state agency, so verify who you are dealing with and confirm the issuing bank is insured. Brokered CDs can often be sold before maturity on a secondary market, but the price may be lower than what you paid.
- Callable CDs allow the bank to end the CD early, usually when rates fall, which means you may have to reinvest at a lower rate.
CDs are attractive when you know you will not need the money for a defined period and want certainty about the rate. A CD ladder, splitting money across CDs that mature at different times, gives you regular access points while still locking in rates for part of your savings.
How deposit insurance works
The FDIC insures deposits at member banks up to at least $250,000 per depositor, per insured bank, for each account ownership category. Deposits in the same ownership category at the same bank are added together. Single accounts, joint accounts, certain retirement accounts and trust accounts are different categories, so a household can be covered for more than $250,000 at one bank if its money is spread across categories. The NCUA provides equivalent coverage at federally insured credit unions.
The FDIC is clear that investment products are not covered, even if you buy them at an insured bank. That includes stocks, bonds, mutual funds (including money market funds), annuities, life insurance, crypto assets and Treasury securities, though Treasuries are backed directly by the U.S. government.
If you use a fintech app that offers a savings product, check whether your money is held at a partner bank, whether the deposits are placed in your name, and how the app’s records are kept. Pass-through insurance depends on these details.
Comparing yields fairly
- Use APY, not the interest rate. Annual percentage yield includes the effect of compounding, so it is the fairest way to compare deposit accounts.
- For funds, look at the seven-day yield and expense ratio. A fund’s yield is reported after expenses, but comparing the costs helps explain differences.
- Check the fine print. Promotional rates may last only a few months, or apply only to balances within a certain range.
- Consider taxes. Interest from bank accounts and CDs is generally taxable as ordinary income at the federal level. Interest from U.S. Treasury securities is exempt from state and local income taxes, which can matter in high-tax states.
Matching the product to the goal
| Goal | Common choice | Why |
|---|---|---|
| Emergency fund | High-yield savings or MMDA | Insured, available within a day or two, no penalty |
| Down payment in 18 months | CD or CD ladder timed to the purchase | Locks in a rate; maturity matches the date you need the cash |
| Annual bills you save for monthly | High-yield savings, possibly several labeled accounts | Flexible deposits and withdrawals |
| Cash waiting to be invested in a brokerage account | Money market fund | Convenient to move into and out of investments |
The bottom line
High-yield savings and money market deposit accounts give you insured, flexible access with variable rates. CDs trade flexibility for a fixed rate over a set term. Money market funds can be useful for cash inside an investment account, but they are investments, not insured deposits. Know which one you are buying, compare APYs and terms, and keep money you might need soon in an insured, accessible account. This article is general education; for decisions about your own finances, consider speaking with a licensed financial professional.
Sources
- FDIC: Understanding Deposit Insurance
- SEC Investor.gov: Mutual funds and money market funds
- SEC Investor.gov: Certificates of Deposit (CDs)
- Federal Reserve: Interim final rule deleting the six-per-month limit in Regulation D (April 24, 2020)
Featured image: Husskeyy / Wikimedia Commons, CC BY-SA 4.0