What are the different types of bank accounts?
When you think about where to store the money from your latest paycheck or the $20 bill your grandma sent you for your birthday, you probably instinctively think about depositing it into either a checking or a savings account. But, what types of bank accounts are best and what are the differences between them?
Although checking and savings accounts are two of the most popular bank account options, there are many types of bank accounts where you can save and easily keep track of your money. Besides checking and savings accounts, there are also money market accounts, certificates of deposit, retirement accounts, and more.
Different types of bank accounts serve different needs, so it’s important to understand how best to utilize each type for spending and saving to help ensure you get the most bang for your buck.
How to choose the right type of bank account
Here’s a closer look at five common types of bank accounts and what to keep in mind when evaluating which ones are right for you.
1. Checking account
A checking account is your go-to account for everyday transactions. Often known as a transactional account, you’re allowed to make as many deposits and withdrawals into and out of your checking account as often as you want.
Once you deposit money into a checking account, you can use a debit card (or sometimes checks) to make purchases, pay bills, or withdraw cash from an ATM. Through online banking, you can also use a checking account to set up automatic bill payments, as well as send money from your account on demand.
If you’re married, you may want a joint checking account that’s in both your and your partner’s name.
Pros: Checking accounts are an easy way to deposit checks, make withdrawals, and pay bills. Most offer online and mobile banking services, a debit card, paper checks, direct deposit, and transfers.
Cons: Checking accounts don’t typically pay interest, so the funds sitting in your account probably won’t be making you more money. Be aware of overdraft fees, out-of-network ATM fees, and monthly fees for having a low balance—or, dodge those fees and get a variety of other perks and features with a Varo Bank Account.
Tips: Take advantage of direct deposit. With direct deposit, your paycheck clears immediately and goes straight into your bank account¹. You can also automatically transfer funds to savings with Save Your Change so that you don’t forget.
2. Savings account
A savings account is a type of bank account that’s designed for storing money. You can withdraw the money when you need it, but there’s an incentive for using your savings account primarily for saving—unlike most checking accounts, savings accounts usually allow you to earn interest on your balance.
Pros: When your money is sitting in your savings account, you’ll probably be less likely to spend it. Plus, it could be earning much more interest than if it were in your checking account.
Cons: Savings accounts may come with a few fees. You also may have limited access to these funds as they accrue interest.
Tips: Savings accounts typically have higher interest rates than checking accounts, and some savings accounts have even higher interest rates than others. Look for a high-yield savings account like the one Varo offers, which comes with a sky-high starting 3.00% Annual Percentage Yield (APY)² that’s higher than those offered by most big banks³.
3. Money market account
A money market account is another great place to store savings—if you have a lot to save. Money market accounts can earn more interest than savings accounts, but that’s because they usually require a higher minimum balance between $5,000 and $10,000.
Some money market accounts offer conveniences such as debit cards and personal checks. However, just like savings accounts, you’re limited to only six withdrawals or transfers a month due to federal regulations.
Pros: There is no fixed interest rate for money market accounts, so when the market is doing well, a money market account can earn more interest than other types of bank accounts, especially if you have a higher balance
Cons: Balance requirements are usually much higher than a savings account. Because there is no fixed interest rate, there are no guarantees that you’ll earn significant interest.
Tips: Because a money market account can earn more interest than a savings account, it’s a great place to store your emergency fund.
4. Certificate of deposit (CD)
A certificate of deposit (CD) is a low-risk way to invest your money—but only if you’re sure you won’t need to access the money for a while. With a CD, you invest your money at a set interest rate for a set period of time, typically ranging from a few months to a few years.
Because you’re not able to access the money until the end of the CD’s term, they generally offer a higher interest rate than money market or savings accounts.
Pros: Because your money is locked in for anywhere from six to 18 months, you can earn more interest.
Cons: Make sure you won’t need the money you deposit into a CD until the end of the CD’s term. If you need to withdraw money before the time is up, you may pay a stiff penalty.
Tips: If you want your money to grow and you won’t need it for a while, shop around for a CD with a longer investment term. Typically, CDs with longer periods offer higher interest rates.
5. Retirement IRA accounts
An individual retirement account (IRA) is where you can stash money for retirement. A big benefit to keeping your savings in a retirement account is that it is a tax-deductible or tax-deferred way to invest your money for retirement.
With a traditional IRA account, your contributions can be deducted from your taxes that same year, and earnings are tax-deferred, which means that when you withdraw the money in retirement, you’ll pay taxes on it.
With a Roth IRA, you pay taxes on your money and then you make a contribution. Because you’ve already paid taxes on your contribution, when you withdraw the money in retirement, you withdraw it tax-free.
Just like an employer-sponsored retirement account, such as a 401(k), deposits made into an IRA are intended to stay in the account until you turn 59½ years old. If you withdraw money early, there will be some sort of penalty.
Pros: Roth IRAs can grow at exponentially faster rates than ordinary savings accounts. The greatest benefit is having a sizable sum tucked away for your golden years.
Cons: IRAs have many restrictions, such as how much you can contribute and when you can start making withdrawals. If you start taking money out before retirement age, you’ll pay significant fees.
Tips: In general, a Roth IRA is good for people who expect to have a higher tax rate in retirement, whereas a traditional IRA is best if you think your tax rate will be lower in retirement. However, you should talk with an experienced accountant for advice about the best way to save given your unique circumstances.
What else do I need to look for in a bank account?
It’s important to consider a few more things when determining both the type of bank account that’s right for you, as well as the institution that’s offering it.
You put money in the bank to keep it safe, so it’s important to choose a bank that can promise security. Make sure your bank is backed by the Federal Deposit Insurance Corporation (FDIC), the U.S. government agency that insures the deposits of the banks they back. Basically, if your bank fails or can’t return your money, the FDIC will pay you the lost money up to the insured limit. You can learn more about FDIC deposit insurance here.
Varo is a member of the FDIC, which means that regardless of what happens in the economy, your money is secure with us up to the FDIC insurance limits, per account holder, per account ownership.
Some banks are now fully online, while others still rely on local branches. With online-only banks like Varo, the lack of brick and mortar branches creates lower operating costs, which means better benefits for your wallet, like a high APY and no fees.
Unlike some banks that charge fees for off-brand ATMs, Varo has no fees at 40,000+ U.S. based Allpoint® ATMs in places you already shop⁴.
Decide how important online or in-person access is to you, and pick a bank that meets those needs.
Good customer reviews
Shopping around is key when it comes to finding the bank account that’s best for you. You work hard for your money, so you deserve a bank that puts you in charge from the get-go and doesn’t hold you back from reaching your financial goals.
You don’t want to be flying blind here. Do some sleuthing to make sure you avoid institutions with a history of bad customer service. A quick online search will tell you a lot of what you need to know about the institution you’re considering opening an account with.
Check the Better Business Bureau and look at customer reviews of the banks you’re looking at. You can also use Trustpilot and other review sites to find out what people are saying about their banking experiences. If you’re planning on banking mostly online, read reviews for the bank’s app too.
Now that you’re armed with some knowledge about the different types of bank accounts, you can begin to determine which options might be right for you. Most people open more than one of these types of bank accounts to meet their various needs throughout life. At the end of the day, the right types of bank accounts for you will depend on what you need to do with your money and how you want to get the most bang for your buck.
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