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 think about depositing it into either a checking or a savings account. What types of bank accounts are best and what are the differences?
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 these tools for spending and saving so you make sure you get the most bang for your buck.
Common types of bank accounts
Here’s a closer look at five common types of bank accounts and what you need to know to evaluate 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 checks to make purchases or 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.
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 money 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 with a Varo online checking account.
Tips: Take advantage of direct deposit. With direct deposit, your paycheck clears immediately and goes straight into your bank account. Automatically transfer funds to savings 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: Because a savings account is for, well, savings, you’re limited to six transfers to a checking account each month. Otherwise, savings accounts usually come with few fees.
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, which offers interest rates that are significantly higher than the national average of 0.09 percent.
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 money market is doing good, 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.
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 between a few months to a few years.
Because you’re not able to access the money until the end of the CD’s term, certificate of deposits have 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: Be 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 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 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.
Now that you have more information about the different types of bank accounts, you can begin to determine which options might be right for you. Many people open more than one of these types of bank accounts to meet their various needs. The right types of bank accounts for you will depend on what you need to do with your money.
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