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Updated on Tuesday, June 1, 2021
Saving money is a key step toward a healthy financial situation, but there are a variety of savings accounts to choose from to stash your funds. Understanding what each account entails — as well as what your own financial needs and goals are — will help you determine which type of savings account is best for you.
Read on to learn more about seven types of savings accounts you can choose from.
1. Traditional savings accounts
Many banks and credit unions offer savings accounts, a simple place for customers to store money and accrue a little bit of interest — though usually at a lower rate than other types of savings accounts. If your bank is a member of the Federal Deposit Insurance Corp. or FDIC (or if it is a credit union, the National Credit Union Administration or NCUA) then your deposits in traditional savings accounts are insured up to the legal limits.
Traditional savings accounts are a good place for an emergency fund or to save for an upcoming future expense, like a down payment on a home. There may be some minimum balance requirements to open or maintain a regular savings account, as well as monthly maintenance fees.
Accessibility: A federal law called Regulation D generally limits you to making six withdrawals per month out of a savings account. Banks charge fees on additional transactions beyond this limit. Branch locations can be an advantage for customers who prefer in-person customer service, and transactions there aren’t subject to the withdrawal limit. Basic savings accounts also usually include ATM access for convenient withdrawals and deposits; those transactions are also not subject to Regulation D limits.
Typical rates: Relative to high-yield savings accounts, money market accounts and CDs, basic or traditional savings accounts usually offer lower interest rates.
2. High-yield savings accounts
High-yield savings accounts are like traditional savings accounts, but with higher interest rates. Banks and credit unions that have an online-only presence tend to offer better rates on savings accounts than traditional banks with physical branch locations. This is because online banks tend to have fewer overhead costs that they can then pass onto their customers through better rates and lower fees.
Like traditional savings accounts, high-yield savings accounts can be insured by the FDIC or NCUA.
Accessibility: Banks that offer high-yield savings accounts are also subject to Regulation D, which limits you to six fee-free withdrawals per month. Some high-yield savings accounts offer debit card access to ATMs, and some financial institutions that offer high-yield savings accounts have physical branch locations. However, as many of these accounts tend to be online-only, you may not be able to visit a physical location and could be limited when it comes to certain types of deposits or transfers.
Typical rates: High-yield savings accounts rates exceed those offered by traditional savings accounts and are competitive with the rates provided by money market accounts. While CDs may have higher rates than high-yield savings accounts, they don’t offer as much liquidity as a savings account.
3. Money market accounts
Money market accounts are similar to standard savings accounts, but there are a few key differences: The minimum deposit to open or maintain an account is usually higher, they tend to offer higher interest rates and the account holder can write checks against the balance. Like other types of savings accounts, money market accounts can be covered by FDIC or NCUA insurance, assuming the institution offering the account has it.
For those who can afford the higher minimum balance to open an account, money market accounts offer more liquidity than other types of savings accounts.
Accessibility: Like other savings accounts, money market savings accounts are subject to Regulation D. However, money market accounts provide a little bit more liquidity than traditional or high-yield savings accounts because you can write checks against the balance. Some money market accounts provide ATM access as well.
Typical rates: Money market savings rates are comparable to those offered by high-yield savings accounts.
4. Certificates of deposit (CDs)
Certificates of deposit, or CDs, are designed for less liquid savings. Customers agree to deposit their money for a set period of time, with CD terms ranging from six months to five years. In exchange, you earn a usually predetermined interest rate that is set at the time of the deposit, though there are some variable rate CDs. CDs are usually insured by the FDIC or NCUA.
Once the term ends, you can withdraw your funds; otherwise, those funds will be rolled over into another CD. If you take out your funds before your term is up, you will face an early withdrawal penalty. If you think you might need to access funds in case of an emergency, or for transactions of any kind, other types of savings accounts might be a better option. But for long-term savings, a CD can be a safe and stable investment with a guaranteed return.
Accessibility: Early withdrawals from CDs are subject to significant fees. Those penalties are often calculated as the interest borne by the account over a certain amount of time, based on the duration of the CD.
Typical rates: CDs at banks and credit unions tend to have the strongest APY rates of any type of savings accounts. Additionally, deposits with longer terms tend to offer higher rates than those with shorter terms.
5. Health savings accounts (HSAs)
Certain types of savings are incentivized, including health savings accounts (HSAs), which are designed for individuals with high-deductible health insurance plans. Those incentives are tax exemptions for qualified medical expenses. As such, contributions to the account aren’t subject to the federal income tax, and earnings can grow in the account tax-free. There are some limits to HSA contributions, however, including a cap on annual tax-free deposits.
HSA accounts can be covered by FDIC or NCUA insurance, though the FDIC does not view them as a unique account category, instead covering them under the umbrella of revocable trust or single account.
Accessibility: Money that’s saved in an HSA can only be spent on qualified medical expenses or reimbursements for those expenses. Otherwise, you will incur steep penalties. These accounts are designed to be used for supplemental medical costs that aren’t covered by health insurance.
Typical rates: Interest rates are very low on most HSAs, but with the advantages of pretax contributions, account holders can save more money than they’d otherwise be able to with a normal savings account. Funds in an HSA can also be invested in some ways, so they could have the potential to grow alongside broader market trends.
6. College savings accounts
Much like how HSAs help with health care costs, there are tax-advantaged accounts for education-related expenses. College savings accounts, or 529 plans, vary by state — some have minimum contributions, and some have state tax benefits. 529 contributions are exempt from federal taxes, though prepaid tuition plans and education savings plans can include some types of fees. Some accounts are insured by the FDIC in certain states.
Accessibility: The requirements for different types of 529 accounts often differ. Some 529 accounts only cover a very narrow set of expenses (such as only tuition to particular schools), while others can include many kinds of education spending (even room and board). There can be significant penalties for unauthorized expenses.
Typical rates: Funds in education savings plans can be invested in assets like mutual funds and ETFs, though the selection available can be limited depending on the state. Those accounts come with some degree of risk, as do all market investments. Compared to other types of savings accounts, the tax advantages and broad market trends give 529 accounts a higher rate of return than other types of savings accounts.
7. Retirement savings accounts
A 401(k) plan and an Individual Retirement Account (IRA) are two of the most common types of retirement savings accounts. A 401(k) is a tax-advantaged investment account offered through an employer. Individuals can make pretax contributions, and some employers offer 401(k) matches up to a certain percentage of an employee’s salary, which doubles the savings amount.
IRAs, on the other hand, are opened independent of an employer. Traditional IRAs allow you to contribute pretax income, and then your money grows tax-deferred and your withdrawals are taxed as income. With a Roth IRA, you contribute after-tax income and your withdrawals are not taxed.
Much like with HSAs or 529 plans, there are significant penalties for unauthorized withdrawals. While deposit accounts held within 401(k)s and IRAs can be covered by FDIC insurance, the FDIC does not protect investments, such mutual funds, within these accounts.
Accessibility: Money can technically be withdrawn from a 401(k) before retirement age, but account holders will incur stiff penalties for doing so. Most 401(k) plans can be accessed beginning at age 59 ½, but some circumstances grant access at age 55. Money can be withdrawn just like standard types of savings accounts, but there are some contribution limits.
Typical rates: Banks that offer 401(k) and IRA accounts tend to provide at least a few options for mutual fund investments — some are more aggressive or risky, while others are more conservative or stable. Still, 401(k) and IRA performance tends to follow the path of the broader market performance.
How to decide which type of savings account is right for you
The first step in deciding which type of savings account to open is determining what your savings needs are. If you’re saving up for your retirement, future health expenses or a child’s education, the tax advantages of the specialty types of savings accounts make them a worthwhile choice if they’re strictly used for those purposes.
Another consideration is liquidity. If you’re creating an emergency savings account to withstand a possible job loss or unexpected expense, you’ll need to be able to withdraw those funds as necessary — so a CD, for instance, would not be a good choice. However, if you want a safe place to keep your money for a while and won’t need it any time soon, CDs can offer marginally better interest rates compared to standard savings accounts.
Beyond those considerations, certain banks may offer incentives or bonuses for opening a savings account with them, and others may value ease of access or a straightforward online platform for their savings. Some people choose to open multiple savings accounts for different purposes as well — for example, contributing to a 401(k) to save for your retirement while building funds in a high-yield savings account to be able to make a down payment on a house.