Online savings accounts can offer a convenient place to keep your money while potentially earning a great rate. Compared to traditional banks, online banks tend to have lower overhead costs. That enables them to pass savings on to their customers in the form of higher rates and lower fees. But is an online savings account FDIC insured? And how safe is your money? Those are important questions to ask if you’re considering moving your savings to an online bank.
For more help with addressing your banking needs, consider working with a financial advisor.
What Is an Online Savings Account?
An online savings account is a savings account that you open online. Traditional banks can offer online savings accounts but they’re more commonly associated with online-only banks. Here are some of the key characteristics of online savings accounts:
- Typically offered by banks and financial institutions that don’t have a physical footprint (i.e., branches or ATMs)
- Balances can earn interest, often at rates that are higher than those found at brick-and-mortar banks
- Often have low or no monthly maintenance fees and minimal fees overall
- Minimum initial deposit requirements may be as low as $1
- Savers can access their money via online or mobile banking and some online banks may also offer an ATM card
Online banks may offer savings accounts along with other types of deposit accounts. For example, you might be able to open a checking account, money market account or certificate of deposit account. Online savings accounts can also be referred to as high-yield savings accounts since they typically have an above-average annual percentage yield (APY).
What Is FDIC Insurance?
The Federal Deposit Insurance Corporation (FDIC) is a regulatory agency for the banking industry. In addition to providing oversight for banks and other financial institutions, the FDIC insures deposits at member banks. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
FDIC insurance is designed to protect consumers against bank failures. While the odds of your bank failing are generally low, FDIC insurance is there to help you get your money back if that does happen. When a bank fails, the FDIC steps in and one of two things can happen.
If the FDIC can find someone to purchase the bank, it will facilitate the sale and the failed bank will reopen under the purchasing bank’s name. Consumer accounts get transferred to the new bank and their money remains untouched.
When the FDIC can’t find a buyer, it closes the failed bank and returns depositors’ money to them. The amount that’s returned to you is determined by the types of accounts you have, the ownership status of those accounts and your balances. The National Credit Union Administration (NCUA) does something similar for depositors who have accounts at member credit unions.
The FDIC doesn’t insure investment products, such as stocks, mutual funds or exchange-traded funds (ETFs). You can, however, get coverage for Individual Retirement Accounts (IRAs) held at FDIC member institutions.
Is an Online Savings Account FDIC Insured?
An online savings account is FDIC insured if it’s affiliated with an FDIC member bank. So if you open a savings account at an online bank that is an FDIC member, your money is protected up to the applicable coverage limits.
Some online savings accounts are not offered by banks. Instead, they’re offered by fintech companies that do not qualify as banking institutions. But those online savings accounts can still be FDIC insured if the company offering them is affiliated with an FDIC member bank. In that case, the company offering the savings account is effectively “borrowing” the member bank’s FDIC coverage to insure saver deposits.
If you have a savings account at an FDIC-insured online bank, you’re covered if the bank fails. That’s reassuring to know since online banks often lack the long track record of more established brick-and-mortar banks.
Having part of your savings in an online account that’s FDIC insured can be a good thing if you tend to keep a large amount of money in cash. FDIC coverage limits apply to each institution where you keep your money. So if you have $500,000 in savings, you could split that money up between savings accounts at traditional banks and accounts at online banks in order to stay within the coverage limits.
Should I Use an Online Savings Account?
An online savings account could be a good fit for someone who wants to earn a competitive rate on deposits and doesn’t mind managing their money online. The higher the APY you earn with a savings account, the more opportunity your money has to grow. And you don’t have to worry about handing some of your interest earnings back in fees if an online bank has no monthly maintenance fee.
On the other hand, you might prefer a traditional savings account if you need branch banking access or you’re simply not comfortable with the idea of managing your money online. You may, however, earn a much lower rate on deposits with traditional savings accounts. You might also have to contend with a monthly maintenance fee at a brick-and-mortar bank.
When considering an online savings account, it may help to use your financial goals as a guide. For example, if you want to build an emergency fund consider how easy it would be to access that money in an online savings account vs. regular savings account.
If you also have a checking account at the same online bank, then you could easily move money over to cover unexpected expenses. On the other hand, you might need to wait a few days for an online transfer to process if you’re moving money from savings to a checking account at a traditional bank.
Also, think about what kind of interest rate you’re hoping to earn. An online savings account could give you more bang for your buck, so to speak, if you’re able to get a rate that’s well above what brick-and-mortar banks offer. If growing your money as much as possible is your primary goal, then an online savings account can help you to meet it.
The Bottom Line
Online savings accounts have some features and benefits that set them apart from traditional savings accounts. One thing they can have in common, however, is FDIC coverage. If you’re unsure whether an online savings account is FDIC insured, you can look for the FDIC logo on the bank’s website. That’s usually a giveaway that your accounts are covered. And if you don’t see it, you can reach out to the bank to ask.
Checking Account Tips
- Consider talking to your financial advisor about whether an online savings account is right for you. Your advisor can discuss various options for where to keep your money in order to make the most of it. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- An online savings account isn’t the only way to fund your financial goals. Money market accounts and CD accounts could be a better choice, depending on your reasons for saving. With a money market account, you may be able to get a debit card or check-writing access for added convenience. CD accounts are designed for savings goals that have a set end date since you might pay a penalty to withdraw money before maturity. Comparing money market accounts, CD accounts and savings accounts can help you decide which one is right for you.
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