Money Market Funds vs. High-Yield Savings vs. CDs: Where Cash Can Sit

When short-term interest rates are meaningfully above zero, idle cash has a real job to do. Three products compete for it: money market funds, high-yield savings accounts and certificates of deposit (CDs). All three are low-risk compared with stocks, and their yields often look similar. The differences are in who stands behind the money, how quickly you can get it, whether the rate is locked, and how the income is taxed.

Money market funds

A money market fund is a type of mutual fund that invests in high-quality, short-term debt: Treasury bills, repurchase agreements, commercial paper and similar instruments. Money market funds are regulated by the SEC under a rule that limits the maturity, quality and diversification of what they hold.

The SEC groups them into three categories:

• Government funds invest almost entirely in cash, US government securities and repurchase agreements backed by them.
• Prime funds also hold corporate debt such as commercial paper, typically offering a slightly higher yield for slightly more credit risk.
• Tax-exempt (municipal) funds hold short-term state and local government debt whose interest is generally exempt from federal income tax.

Funds intended for individual investors, and all government funds, generally aim to keep a stable share price of $1.00. Institutional prime and institutional tax-exempt funds must use a floating share price that can move slightly above or below $1.00.

Key points about protection:

• Money market funds are not FDIC-insured and are not guaranteed by the government.
• If a stable-value fund's underlying value strays too far from $1.00, it must reprice, known as breaking the buck. It is rare: the best-known case was in September 2008, during the financial crisis.
• SIPC coverage at a brokerage protects against the brokerage firm failing and your securities going missing. It does not protect against a fall in the value of a fund.

Yields are usually quoted as a 7-day SEC yield, an annualized figure based on the most recent week's income after fund expenses. The yield changes daily as the fund's holdings mature and are replaced, so it moves closely with the Federal Reserve's policy rate. Expense ratios still matter: on a low-yielding product, a small difference in fees takes a noticeable share of the income. FC Markets explains fund costs in Fund Fees Explained.

High-yield savings accounts

A high-yield savings account is an ordinary bank deposit, frequently offered by online banks, that pays a higher interest rate than a traditional branch savings account.

• Insurance: deposits at FDIC-insured banks are covered up to $250,000 per depositor, per insured bank, for each account ownership category. Credit union deposits have equivalent coverage through the NCUA. Some fintech apps hold customer money at partner banks, so it is worth confirming which bank holds the deposit and whether coverage passes through to you.
• Rates are variable. The bank can change the rate at any time, and rates on savings accounts tend to follow the Fed's moves with a lag.
• Quoted as APY. The annual percentage yield includes the effect of compounding, making it comparable across banks.
• Access: money is typically available within a day or two through transfers. The federal limit of six convenient withdrawals per month on savings accounts was removed from Federal Reserve rules in 2020, but individual banks can still set their own limits.

A money market deposit account, despite the name, is also a bank deposit and is FDIC-insured; it is not a money market fund.

Certificates of deposit

A CD pays a fixed rate for a fixed term, from a few months to several years, in exchange for leaving the money in place.

Bank CDs are bought directly from a bank or credit union and carry the same deposit insurance as savings accounts. Taking money out early usually means an early-withdrawal penalty, often expressed as a number of months of interest.

Brokered CDs are issued by banks but bought through a brokerage account. They also carry FDIC insurance within the limits, but they work differently:

• There is usually no early-withdrawal option; instead you sell on the secondary market, at a price that rises or falls with interest rates, just like a bond.
• Some are callable, meaning the issuing bank can redeem them early, typically when rates have fallen, leaving you to reinvest at lower rates.
• Holding CDs from several different banks can extend total FDIC coverage, since the limit applies per bank.

The SEC's Investor.gov site has a useful checklist of questions to ask before buying a brokered CD.

Side-by-side

Taxes

Interest from savings accounts and CDs, and the income from most money market funds (paid as dividends), is generally taxed as ordinary income at the federal level and, in most states, at the state level too. A few differences can change the after-tax comparison:

• Government money market funds that hold mostly Treasury securities may pass through income that is exempt from state and local income tax. The fund publishes the share each year, and rules vary by state.
• Municipal money market funds pay income that is generally exempt from federal tax, and sometimes state tax for residents of the issuing state.
• Treasury bills bought directly are exempt from state and local tax, which is why they are often compared with these products. FC Markets covers them in Treasury Bills, Notes, Bonds and TIPS.

For someone in a high-tax state, a slightly lower yield that is state-tax-free can come out ahead after tax.

Brokerage cash sweeps

Uninvested cash in a brokerage account is often "swept" automatically into either a money market fund or one or more partner bank accounts. Sweep rates vary widely between firms and sometimes pay far less than what is available elsewhere. It is worth checking where your cash actually sits and what it earns; many brokerages let you buy a money market fund manually instead of relying on the default sweep. The basics are covered in How to Open a Brokerage Account.

Matching cash to its purpose

A practical way to decide is to sort cash by when it might be needed:

• Emergency fund and near-term spending: prioritizing immediate access and stability, people commonly use insured savings accounts or money market funds.
• Money for a known date, such as a tuition bill or a home down payment in 18 months: a CD or Treasury bill maturing just before the date can lock a rate and remove guesswork.
• Cash waiting to be invested: flexibility tends to matter more than squeezing out the last fraction of a percent.

Some savers build a CD ladder, splitting money across CDs with staggered maturities so part of it comes due regularly. That balances access against the ability to lock rates.

None of these products is designed for long-term growth, and over long periods inflation can erode their real value. They are tools for safety and liquidity, and the right mix depends on how soon the money may be needed and how much certainty you want about the rate.

This article is for general information and education only and is not financial, investment, tax or legal advice. Consider your own circumstances and consult a licensed professional.