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Updated on Thursday, April 25, 2019
When you think about the different types of bank accounts available, checking and saving might be all that comes to mind. But it’s not that simple: bank accounts actually come in many different flavors.
Besides checking and savings accounts, there are also money market accounts, certificates of deposit and retirement accounts — not to mention cash management accounts, which are a hybrid of several different types of accounts.
Confused yet? Don’t be: Here’s what you need to know about each of these types of bank accounts.
Everyday liquidity: checking accounts
A checking account is a type of bank account used for everyday spending, as opposed to long-term saving. You can make an unlimited number of transactions into and out of a checking account, and it’s typically the account into which you’d deposit paychecks via direct deposit. In the past, people accessed their money in checking accounts by writing paper checks or withdrawing cash at a bank, but nowadays most consumers are using debit cards.You used to only be able to open checking accounts at traditional brick-and-mortar banks or credit unions. But in recent years, online-only banks have multiplied, offering higher-interest checking accounts than traditional financial institutions due to lower overhead costs. If you’re skittish about using an online-only bank, know that just like brick-and-mortar banks, they are also covered by the FDIC, a government agency that insures funds in bank accounts up to $250,000.
“Ever since the inception of the FDIC in 1933, no depositor has lost a penny of insured deposits due to a bank failure,” said FDIC spokesman Greg Hernandez. “All FDIC-insured banks, whether online or brick and mortar, are governed by the same deposit insurance regulations.”
Long-term money storage: savings accounts
There are several types of bank accounts intended to help you save, from money market accounts to retirement accounts. There are also certificates of deposit, but more on those below. Here’s a comparison of the most common types of bank accounts used to save money.
Conventional savings accounts
The most common one you’ll encounter is a conventional savings account. Since your money stays parked longer than in a checking account, these accounts usually earn more interest, especially if you get an online-only savings account.These types of bank accounts are best suited to long-term savings goals, rather than frequent spending. That’s because savings accounts don’t come with debit cards like checking accounts do, so the money isn’t as easily accessible. In addition, due to federal regulations, you can only make six electronic transfers out of savings accounts per month (in-person and ATM transactions are unlimited). So if you need to make frequent transactions, move money between accounts or make ACH transfers often, a savings account might not be the best fit. A savings account is complementary to a checking account, since you can link them and easily transfer money between them, and even use it for overdraft protection.
Money market accounts
Another option is a money market account, which is like a blend of a checking and savings account. Intended as a vehicle for savings, money market accounts usually have much higher interest rates than checking accounts; unlike traditional savings accounts, some money market accounts provide a debit card for transactions.However, just like savings accounts, you’re limited to only six transfers a month due to federal regulations. It’s also important to know keep that some money market accounts may require high balances to open the account or start earning interest, and the amount of interest you earn depends on your balance. In other words, you might not earn a great interest rate until your balance reaches a certain amount.
Health savings and flexible spending accounts
You might also want to save money using a health savings account (HSA) or a flexible spending account (FSA). These types of bank accounts hold tax-advantaged savings specifically for eligible medical expenses, such as doctor visits or prescriptions.FSAs are offered through employers, and they allow you to set aside pre-tax dollars from your paycheck to pay for qualified medical costs. Any employee can sign up for one, as long as they don’t also have an HSA. The money can’t be invested elsewhere, and you have to use it by the end of each year or you lose it. Also, when you leave the employer, you no longer have access to the account.
HSAs, on the other hand, are only available to those who have a high-deductible health plan. An HDHP is defined annually by the IRS; currently, it means plans with a deductible of at least $1,350, or $2,700 for your family. But the money in an HSA can be invested elsewhere, and it doesn’t expire. This account stays with you, not your employer.
The hybrid option: cash management accounts
Then there’s the cash management account, a type of bank account that combines the best aspects of savings and checking accounts. While accounts like this used to require minimum balance requirements or a minimum amount to open, some financial institutions are now offering cash management accounts without these restrictions.These accounts usually let you access money via a debit or credit card or checks, and some let you withdraw money from an ATM, allowing you to use it like a checking account. Some also have Bill Pay services like a checking account. But due to the safety of the investment and healthy interest rate, it’s also a great place to park money for an emergency fund and either long-term or short-term savings.
Low-risk investing: certificates of deposit (CDs)
If you want your money to grow and you won’t need it for a while, a certificate of deposit, more commonly known as a CD, is another savings option. CD interest rates are fixed and depend on the amount invested; the longer the investment term, the higher the interest rate. CDs are ideal for conservative investors, since they guarantee an exact return in a set timeframe.When you invest these types of bank accounts, you choose a set time period over which the certificate matures, usually anywhere from six months to five years, though it can be longer. Since the idea is that you won’t be able to access your money during that time, interest rates are typically higher than with savings accounts. In fact, most CDs charge a penalty fee if you withdraw the money before it matures, though there are some no-penalty CDs that don’t ding you for this. However, you should be aware that some CDs require a minimum amount to open.
If you have at least $100,000 to invest, you can purchase a jumbo CD, which might offer a higher interest rate than a regular CD. You might also encounter a step-up CD, which means its interest rate automatically increases at set intervals.
One strategy to maximize CDs is creating a CD ladder. This means rather than keeping all of your money locked up in one long-term CD, you invest in several different CDs to give you more flexibility. Essentially, you stagger your investments into multiple CDs, so you are able to access money more frequently. When each matures, you can either cash out or renew it.
Save for your golden years: retirement accounts
Many workplaces provide 401(k) retirement accounts, but if you’re self-employed or want to save even more for retirement, you can open an individual retirement account (IRA). While this tax-advantaged retirement account comes in several forms, the two you’ll most frequently encounter are traditional and Roth. The key differences are when you get to enjoy the tax break.
With a traditional IRA account, you contribute money that you can deduct that same tax year, and it grows tax-deferred. When you withdraw the money in retirement, you’ll pay taxes on it.
With a Roth IRA, you contribute money you’ve already paid tax on, so you withdraw it tax-free and it might grow tax-free if you meet certain requirements. A Roth is ideal for those who expect a higher tax rate in retirement, whereas a traditional IRA is best if you think your tax rate will be lower in retirement.
Keep in mind that IRAs have many restrictions, such as how much you can contribute and when you can start making withdrawals; you can face penalties if you start taking money too early.
There’s also a lesser-known financial product called an IRA CD. When you invest money in an IRA account, you choose how to invest it; you could purchase stocks, bonds, or in this case, a CD. An IRA CD works just like a regular CD; the main difference is you’re using money in your IRA account to purchase it. The APR on an IRA CDs may be higher than a traditional CDs, and you can do this with a Roth or traditional IRA.
Whether your goals are having a place to collect your paychecks or a way to save for your future — or both at the same time — there are numerous types of bank accounts available that can meet your needs.