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What Are the Different Types of Bank Accounts?

You have some money that you want to put in the bank. What type of bank account should you put it in to make sure you get the most bang for your buck? It can get confusing with all the potential options. Should you stick with a savings account? Is it time to start a retirement account? Or should you put your money in a certificate of deposit? Read on as we sort through the different types of bank accounts to help you find the right one for your situation.

Savings Accounts

A savings account is one of the most straightforward types of bank accounts. You deposit money into a savings account and then you can withdraw that money when you need it. You can access your money in person at a bank, through an ATM or online if your bank allows you to manage your accounts online.

Banks encourage people to use a savings accounts by offering interest on people’s money. Interest rates vary from bank to bank and based on the overall economy. Online banks, which do not have physical locations, typically offer higher interest rates than traditional banks. The majority of banks use compound interest, but how frequently it compounds will depend on the bank.

You can withdraw money from a savings account but this is not the ideal type of account if you plan to frequently withdraw money. There is a federal rule, called Regulation D, that limits the number of monthly withdrawals you can make to six per month. That may seem restrictive but the goal is to make sure that people use their savings accounts primarily for saving.

If you are considering a savings account, look for accounts with the highest interest rates and the least fees. Some accounts require you to deposit a certain amount in order to open an account. There may also be a minimum amount that you need to maintain in your account at all times. Because of their simplicity, savings accounts work well for young people who are just starting to save money and people who are trying to build good saving habits.

Checking Accounts

The advantage of a checking account is that you can use your money for making payments. You can write checks and use a debit card with a checking account. With both checks and debit cards, the money that you spend is withdrawn directly from your account. If your bank allows online banking, you can also use a checking account to send online bill payments.

Unlike a savings account, your money won’t earn much interest in a checking account. Generally, banks offer very low interest rates or no interest at all on their checking accounts. You can usually make as many transactions as you want with your checking account, though some banks charge a fee for making more than a certain number of transactions or for writing more than a certain number of checks per month.

As with savings accounts, there are a few fees to watch out for with checking accounts. There is usually a minimum deposit needed to open an account. This fee is often around $25 but varies from bank to bank. Once you have an account, you may need to maintain a minimum balance. If your account goes below that minimum, you will have to pay a fee. Depending on the bank and checking account, you may also need to deposit a certain amount in your checking account each month. Fees vary between banks and not all banks even charge them. Make sure to ask about fees before you open an account. (Here’s a checking account comparison tool to help you get started with your search.)

Certificate of Deposit (CD)

What Are the Different Types of Bank Accounts?

A certificate of deposit, or CD, typically earns you interest at a higher rate than either a savings or checking account. The catch is that a CD has a specified term length. You cannot touch your money during that term. A term can range anywhere from three months to five years (60 months). In return for not having access to your money, you earn a higher interest rate then you would with just a savings account.

Let’s say you have $250 and are willing to put that money in a CD for six months. You can go to your bank and tell them you want to put $250 in a six-month CD. (You can also do this over the phone.) They will be able to tell you the current CD interest rates and how much you can expect to earn. Once you buy the CD, you won’t be able to use your money for six months but it will earn interest. When the CD matures (reaches the end of its full term) you will receive your original $250 plus whatever interest accrued. When the CD is close to maturing, you will have to tell your bank if you intend to withdraw the money. If you don’t say anything, it’ll probably reinvest your money into another CD of the same value and term length.

A CD is a great way to earn money because of its higher interest rates. However, you shouldn’t put money into a CD if you will need the money before the end of the term. It is possible to withdraw your money early, but you will pay a penalty. The penalty often equals six months of interest.

Money Market Accounts

Money market accounts offer a combination of features from the three types of bank accounts above. They provide a safe place to store your money and you can withdraw your money whenever you need it, like a savings account. You can use checks and debit cards like you can with a checking account. Money market accounts earn interest at higher rates than a savings account, like a CD.

With that great combination of features, why doesn’t everyone just get a money market account? One reason is the cost. Banks require a high minimum deposit to open a money market account. The minimum is often $5,000 or more. You also need to maintain a high balance to avoid additional fees.

Checks and debit cards work with a money market account, but Regulation D applies the same way it does with a savings account. You can only make six transfers out of a money market account each month. A bank may also restrict the number of checks that you can use per month. Still, a money market account is a good option if you can afford it. It also becomes a better option the more money you have. The interest rates are tiered, so you will have a higher interest rate if you have more money in your account. Money market accounts are also useful for people who keep high amounts of money in their checking account. You can write checks but your money still earns interest.

Looking for a money market account? We’ve outlined what the best MMAs for 2018 are.

Individual Retirement Accounts (IRAs)

Individual retirement accounts, know as IRAs, allow you to save for retirement. You might have a retirement plan at work, like a 401(k), but you can manage an IRA completely independently of where you work. There are two main types of IRAs.

A traditional IRA is tax-deductible. You can put money into a traditional IRA without paying any income tax. This is a great way to lower your taxable income each year. You can then withdraw the money once you reach the age of 59.5. If you withdraw before that age, you will have to pay income tax on your withdrawal plus a big penalty. You will need to pay income taxes on withdrawals you make after age 59.5 as well, but your money should have grown significantly.

A Roth IRA offers more flexibility but uses after-tax dollars. So you pay income tax on the money upfront and then it grows tax-free in your Roth IRA. You can withdraw your contributions before age 59.5 and you don’t have to pay any income tax on the withdrawals. A Roth IRA is also useful for non-retirement savings. You could use it to save for a big expense, like the future down payment on a house, or as a place to put your emergency fund.

The Bottom Line

What Are the Different Types of Bank Accounts?

There are a lot of ways you can put your money in the bank. The right type of bank account for you will depend on what you need to do with your money.

If you just want a place to store savings while earning some interest, try a savings account. If you need to send payments or if you want to use a debit card, go for a checking account. The best CDs earn you more interest than a savings account but you won’t have access to your money if you need it in a pinch. People who keep a lot in their checking accounts might benefit from a money market account. IRAs can help you build retirement savings but may also serve other functions.

No matter what type of bank account you choose, look for for an FDIC-insured bank and an account with as few fees as possible.

Tips to Help you Choose the Right Type of Bank Account

  • If you don’t have any money in the bank, a savings account is a good place to start. They’re simple and your money will work for you by earning interest. Look for a savings account with the highest interest rates. There more you can earn, the better! Online banks usually offer higher interest rates than physical banks so you might want to consider an online bank vs. a traditional bank.
  • Always look for an FDIC-insured bank. This let’s you know that the bank is legitimate and the FDIC ensures you don’t lose your money even if the bank or economy does poorly.
  • The best savings and checking accounts have minimal fees. Find an account that costs very little to start and has a minimum balance requirement. Understand any fees the bank charges because fees can cost you a lot in the long run. To get you started, here are six bank fees and how to avoid them.
  • If you are saving for retirement, you’ll want to learn a little more about IRAs to decide which is best for you. To help you decide, here’s an article about Roth vs Traditional IRAs. A financial advisor can also give you further guidance on selecting the right retirement account. The SmartAsset matching tool can help you find a financial advisor to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/Alina555, ©iStock.com/Sohel_Parvez_Haque, ©iStock.com/simonkr

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society of American Business Editors and Writers and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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