Types of Bank Accounts
Bank accounts come in all different shapes and sizes. No one bank account is going to meet all your needs. Most people open several different bank accounts to match their spending and savings needs.
There are 5 main categories of accounts that most banks and credit unions offer.
- Savings Accounts
- Checking Accounts
- Money Market Accounts
- Certificates of Deposit (CD)
- Retirement Accounts
Using a combination of these accounts can help you manage your finances effectively and maximize the return on your investment while avoiding fees.
Related: What Bank is Right for You?
Usually one of the first bank accounts that anyone will open in their life, savings accounts are a common way to get children involved in banking and putting their money away for a rainy day.
Savings accounts are great for stashing away money for an emergency. They are also a great way to establish a relationship with your financial institution. If you choose a credit union, your share savings is the key to becoming a member. It signifies that you own a share of the credit union you choose to work with.
The Good: Savings accounts are great starter accounts for children or teenagers. It’s also a great place to stash emergency funds to access easily.
The Bad: Basic savings accounts come with low interest rates compared to other types of accounts. Therefore they’re not a great place to keep large sums of money. You are also limited by the Federal Reserve’s Regulation D which limits you to six withdrawals from your savings or money market accounts or incur additional fees.
Checking accounts are the type of bank account you’ll use for spending money. They’re named because most checking accounts come with paper checks for you to write to pay your bills.
Nowadays, most checking accounts come with debit cards to make spending your money easier. Online banking now allows you to pay many of your bills directly out of your checking account, simplifying the whole process.
The Good: Checking accounts are essential to spending money. Debit cards are the primary way to make purchases.
The Bad: There are many fees associated with checking accounts if you don’t comply with the bank’s terms. But there are usually a few different ways to avoid all those fees either with a minimum balance, a required amount of direct deposits, or linking a savings account.
Money Market Accounts
Money market accounts are like savings accounts on steroids. They provide you with much higher interest rates than your typical savings account. If you’re the kind of person who keeps your entire life savings in a checking account, consider opening a money market. Let your money make money for you.
The Good: If you keep more money in your checking account than you can spend in a month, put your cash into a money market account. You’ll benefit from the higher interest rates.
The Bad: Money market accounts typically require a high opening deposit, usually in the range of $10,000 and up. And like savings accounts, money markets are also covered under Reg D which limits the amount of times you can take from a money market account in a month to six withdrawals.
Certificates of Deposit
Certificates of Deposit, or CDs as they’re more commonly referred to, offer one of the best interest rates that a bank can offer. But there’s always a catch. When you open a CD, you must commit to leaving your money in the account for a specific period of time. The typical term for a CD can last from 6 months to 27 months.
The Good: CDs offer some of the best rates in the business. If you don’t need to spend the money and are okay with locking it up, a CD is your best option for earning interest.
The Bad: If you need to withdraw your money from a CD early, you’ll incur a hefty fee. You can expect to lose all the interest you earned and can potentially end up with less money than you deposited in the first place.
Saving for retirement is incredibly important. Most banks offer Traditional IRAs and Roth IRAs to allow you to get started. These accounts have lots of tax benefits. The money in your retirement account accumulates tax-free. Traditional IRAs offer a tax deduction when you contribute money to them. On the other hand, there is no tax deduction on your contributions to a Roth IRA, but the money you withdraw once you retire is completely tax-free.
The Good: Saving for the future. You can’t just rely on Social Security to get you through your retirement. Build your savings and let it grow. You’ll be thankful you did. There’s also plenty of tax benefits to go along with your retirement accounts.
The Bad: Withdrawing money early from a retirement account, which is anytime before you turn 59 and 1/2, comes with tax penalties. Unless you meet very specific criteria, early withdrawals from an IRA are subject to an additional 10% tax. You are also limited to the amount of money you can contribute to an IRA each year. Excess contributions to an IRA are subject to a 6% excise tax. Consult your accountant or tax preparer when opening an IRA to make sure it’s the right choice for you.
Related: How to Open an IRA