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The Best Checking Accounts for April 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The best checking accounts offer competitive rates, rewards and easy access to cash without any fees. If you’re looking for the best checking account for your banking needs, take a look at our top picks for April 2020.

Every month, MagnifyMoney’s elite team of financial experts review offers from over 12,000 banks and credit unions, highlighting the best checking accounts we can find. We analyze each account for the following features:

  • Competitive interest rates
  • No monthly account fee or minimum balance requirements
  • No ATM fees and ATM-fee reimbursements
  • Bonus and cash-back offers
  • Special features for students and small businesses

Here are MagnifyMoney’s top picks for the best checking accounts in April 2020:

Summary of the Best Checking Accounts for April 2020

Best Overall Checking

Simple

Simple Review

Best High-Yield Checking

Consumer Credit Union Rewards Checking

Consumer Credit Union Review

Best Free Checking Account

Axos Bank Rewards Checking

Axos Bank Review

Best No-Fee Checking

BBVA Free Checking

BBVA Compass Review

Best Checking Account Bonus

Wells Fargo

Wells Fargo Review

Best Rewards Checking Account

Discover Cashback Debit

Discover Bank Review

Best No-ATM Fee Checking

TD Bank Beyond Checking

TD Bank Review

Best Business Checking Account

Axos Bank Business Interest Checking

Axos Bank Review

Best Checking Account for Students

Chase College Checking

Chase Bank Review

Best Joint Checking Account

Ally Bank

Ally Bank Review

Best Overall Checking Account – Simple

Simple

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on Simple’s secure website

Highlights:

  • Free access to 40,000 Allpoint ATMs
  • No overdraft fees
  • Access to tools that allow you to automate your budgeting and savings
  • APY: 1.55% on balances in Protected Goals
  • Maintenance Fee: $0
  • Current Promotions: N/A

Read the full review

Why we picked it: Through a partnership with BBVA, Simple offers a great checking account with attractive budgeting features and a competitive APY. This account is great for those looking for a traditional checking account without unnecessary fees and stocked with benefits like interest and free ATM access.

What to watch out for: While you can earn a decent APY on the funds in your Protected Goals account, Simple doles out a dismal 0.01% APY on funds that are not in your Protected Goals account, a sub-account designed for money you set aside for savings. It’s also worth noting that fees may apply to ATMs outside of its Allpoint ATM network, and there is a Visa fee of up to 1% if the card is used internationally.

Best High Yield Checking Account – Consumers Credit Union Rewards Checking

Consumers Credit Union (IL)

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on Consumers Credit Union (IL)’s secure website

NCUA Insured

Highlights:

  • Access to over 30,000 ATMs
  • Most lucrative rates require minimum direct deposits or spend on CCU Visa credit card
  • APY: up to 3.09%
  • Maintenance Fee: $0
  • Current Promotions: N/A

Read the full review

Why we picked it: The Consumers Credit Union has routinely offered sky-high rates, even in a plummeting rate environment, earning this account the title of Best High-Yield Checking account.

While this is a tiered rate account, the lower tiers — which can be earned with fewer requirements — still offer attractive rates that are well above those offered by other banks and credit unions.

What to watch out for: While balances between $10,000 and $25,000 — regardless of your tier — earn an APY of 0.20%, it’s worth noting that balances over $25,000 earn an APY of just 0.10%.

Additionally, if you don’t meet the monthly activity requirements, you’ll earn an APY of just 0.01% and won’t receive ATM refunds. The account also has an overdraft fee of $30.

Best Free Checking Account – Axos Bank Rewards Checking

Axos Bank

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on Axos Bank’s secure website

Member FDIC

Highlights:

  • No overdraft or non-sufficient funds fees
  • Unlimited domestic ATM fee reimbursements
  • APY: up to 1.25%
  • Maintenance Fee: $0
  • Current Promotions: N/A

Read the full review

Why we picked it: We have crowned the Axos Bank Rewards Checking account as the Best Free Checking account not only for its attractive features, but for its consistency, too.

The Axos Bank Rewards Checking account has consistently offered competitive APYs — even as earning rates drop at other banks. This account also offers all of the bells and whistles that the best standard checking accounts have been known to include, like ATM fee reimbursements and no overdraft fees.

What to watch out for: The Axos Bank Rewards Checking account is a tiered, interest-earning variable rate account. So, in order to earn the 1.25% APY, you must meet the following requirements:

  • Receive monthly direct deposits totaling $1,000 or more
  • Use your debit card for a total of 15 transactions per month minimum of $3 per transaction)

If you don’t meet those requirements, you will receive a reduced APY from what is advertised. There is also a $50 minimum balance required to open this account.

Best No-Fee Checking Account – BBVA Free Checking

BBVA

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on BBVA’s secure website

Member FDIC

Highlights:

  • Free ATM access at BBVA ATMs
  • For $5 per month, you can receive up to four rebates per statement cycle for ATM fees charged by other banks, as well as no BBVA fees at non-BBVA ATMs
  • APY: None
  • Maintenance Fee: $0
  • Current Promotions: N/A

Read the full review

Why we picked it: If you’re looking for a basic checking account that gets the job with no fees or frills, the BBVA Free Checking account is a product worth exploring.

This checking account provides you with the basic checking necessities, with no monthly fees. Additionally, it gives you the ability to customize your account further for additional charges. For example, an extra fee of $2 a month will give you unlimited cashier’s checks.

What to watch out for: With the BBVA Free Checking account, there is a $25 minimum balance required to open an account and a potential overdraft fee of $38.

Best Checking Account Bonus – Wells Fargo Everyday Checking

Wells Fargo Bank

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on Wells Fargo Bank’s secure website

Member FDIC

Highlights:

  • Access to over 13,000 Wells Fargo ATMs
  • Features budgeting, cash flow and spending tools
  • $10 monthly service is waived if you meet any one of their requirements
  • APY: None
  • Maintenance Fee: $10
  • Current Promotions: $400 bonus with $4,000 in direct deposits

Read the full review

Why we picked it: Wells Fargo’s Everyday Checking account is currently offering an attractive bonus offer, expiring July 31, 2020. Upon opening a new Wells Fargo Everyday Checking account and depositing a minimum of $4,000 in qualifying direct deposits within 90 days of opening, you’ll receive a $400 bonus.

This offer is only available to new Wells Fargo checking and savings customers in Denver, Houston, Miami, Orlando, Fla., Phoenix and Seattle. You also must not have received a bonus for opening a Wells Fargo consumer checking or savings account within the past 12 months.

What to watch out for: This account requires a $25 initial deposit to open. You should also be aware of the not-so-obvious fees associated with this account, which include a $2.50 fee for cash withdrawals at non-Wells Fargo ATMs in the U.S ($5 outside of the U.S.) and a $35 overdraft fee.

Best Rewards Checking Account – Discover Cashback Debit

Discover Bank

SEE DETAILS 

Discover Bank's website is secure

Member FDIC

Highlights:

  • 1% cash back on up to $3,000 of debit card purchases per month
  • No insufficient funds fee
  • Access to over 60,000 no-fee ATMs
  • APY: None
  • Maintenance Fee: $0
  • Current Promotions: N/A

Read the full review

Why we picked it: The Discover Cashback Debit checking account is a standout account, with no fees and access to over 60,000 ATMs.

What really earns this account the title of Best Rewards Checking account, though, is the fact that it offers 1% cash back on all debit card purchases, up to $3,000 per month. This is a unique perk among checking accounts, and if you prefer cash back to earning interest, this could be the account for you.

What to watch out for: There aren’t too many surprises with this account, just be aware that fees for non-Discover ATMs may apply.

Best No-ATM Fee Checking Account – TD Bank Beyond Checking

TD Bank

SEE DETAILS 

Member FDIC

Highlights:

  • No fees at TD Bank ATMs, and reimbursed fees for out-of-network ATMs for accounts that maintain a daily balance of at least $2,500
  • No required minimum opening deposit
  • Overdraft fees reimbursement offered up to two times per year
  • APY: Up to 0.01%
  • Maintenance Fee: $25
  • Current Promotions: N/A

Read the full review

Why we picked it: TD Bank’s Beyond Checking account is a great option for those who prioritize fee-free access to ATMs.

With this account, not only do you receive fee-free ATM access to TD Bank’s network of ATMS, but if you maintain a minimum daily balance of at least $2,500, TD Bank will reimburse you for any fees incurred at out-of-network ATMs. As the cherry on top, this account also doles out a little bit of interest.

What to watch out for: Be aware that the 0.05% APY is available only to accounts with a minimum daily balance of $50,000. Accounts with balances between $10,000 and $49,999 receive an APY of just 0.03%, while balances under $10,000 receive an APY of just 0.01%. There is also a $35 overdraft fee associated with this account.

Best Business Checking Account – Axos Bank Business Interest Checking

Axos Bank

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on Axos Bank’s secure website

Member FDIC

Highlights:

  • Unlimited domestic ATM fee reimbursement
  • Up to 50 free transaction items per month
  • Monthly service fee can be waived if you maintain an average, daily minimum balance of $5,000
  • APY: Up to 0.80%
  • Maintenance Fee: $10
  • Current Promotions: New business owners eligible for a $50 Welcome Bonus

Read the full review

Why we picked it: Axos Bank’s Business Interest Checking account stands out among other business checking account products for a myriad of reasons, most notably its surprisingly low fees.

Additionally, Axos Bank throws in a number of freebies with its Business Interest Checking account, from ATM fee reimbursements to free checks, making it our pick for the Best Business Checking Account.

What to watch out for:Transactions are $0.50 each after the first 50, and there is a $100 minimum opening deposit required for this account.

Best Checking Account for Students – Chase College Checking

Chase Bank

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on Chase Bank’s secure website

Member FDIC

Highlights:

  • $6 monthly service fee waived for up to five years if you are 17 to 24 years old, have proof of student status and are enrolled in college, or if you meet any one of Chase’s monthly requirements
  • No monthly service fee on a Chase Savings account linked to this account for overdraft protection
  • APY: None
  • Maintenance Fee: $6
  • Current Promotions: $100 bonus for new Chase customers with qualifying activities

Read the full review

Why we picked it: The Chase College Checking account is a great option for students, as it waives its monthly service fee for those between the ages of 17 and 24 who have proof of a student status, for up to five years while in college.

With widespread ATM access, the ability to pay friends with QuickPay or Zelle and a robust mobile app, this account checks all the boxes for college students.

What to watch out for: For this account, you’ll need to show proof of student status. Also, there’s a $2.50 non-Chase ATM fee and $34 overdraft fee associated with this account.

Best Joint Checking Account – Ally Bank Interest Checking

Ally Bank

SEE DETAILS 

Member FDIC

Highlights:

  • Free access to Allpoint ATMs and up to $10 in ATM fee reimbursements per statement cycle
  • No required minimum opening deposit
  • 0.10% APY on balances less than $15,000; 0.50% APY on accounts with a minimum daily balance of $15,000
  • APY: Up to 0.50%
  • Maintenance Fee: $0
  • Current Promotions: N/A

Read the full review

Why we picked it: Ally Bank’s Interest Checking account features minimal fees, variable interest and added perks like up to $10 in ATM fee reimbursements every month.

All of Ally Bank’s banking products support joint ownership, and you are allowed up to four owners on the account without any additional fees, making this an easy pick for our Best Joint Checking account.

What to watch out for: There’s not much to watch out for with this account, just be aware of the $25 overdraft fee.

FAQs: What should I know about checking accounts?

A checking account is a bank account for your day-to-day spending needs. They typically come with a debit card, which allows you to make purchases and provides quick and easy access to cash, making it a safer option than carrying cash. Many checking accounts are also offered with paper checks.

Unlike savings accounts, checking accounts typically have no transaction limits, making them the most liquid option for your money aside from holding large amounts of cash. Checking accounts are also FDIC-insured which adds peace of mind.

There are many free checking account options out there. Some options — especially those offered by online banks — are free accounts that even offer extra features like interest and rewards. Keep in mind that many banks will still feature things like inactivity fees, minimum balance requirements or paper statement charges for their “free checking” accounts.

If you’re paying monthly maintenance fees, minimum balances fees or even third-party ATM fees, it’s worth it to do some research, as there are other accounts out there that will give you more bang for your buck and won’t nickel and dime you for it either. Shop around to find the best free checking account for you.

Yes, many checking accounts earn interest, although the amount offered is typically far less than rates offered by savings accounts or money market accounts.

If you’re looking for the best high-yield checking account, many smaller banks and credit unions offer Kasasa checking accounts, which are essentially free checking accounts that offer higher interest rates, so long as you meet a few monthly requirements.

Checking accounts are used for your everyday spending needs and generally don’t carry interest (however high-interest checking accounts do exist); by contrast, savings accounts usually carry higher interest rates and are meant for you to save money over the long-run.

Keep in mind that savings accounts will typically restrict access to your cash to around six withdrawals per month while checking accounts allow you almost unrestricted access to any cash you hold in the account.

It’s a good idea to maintain a free or no-fee checking account for day-to-day use. Generally speaking, the best checking accounts allow unfettered access to cash and carry no monthly fees, ATM-fees, or other account surcharges.

Almost every checking account offered by major banking institutions is insured by the FDIC, which provides an accountholder with up to $250,000 in federal deposit insurance in the event the underlying bank runs into trouble.

As with any other deposit account, it’s easy to find out whether your checking account has FDIC coverage. You can check to see if your financial institution has FDIC insurance by looking for the “Member FDIC” tag that often appears at the bottom of the bank’s marketing materials.

FDIC insurance covers deposits in checking accounts, savings accounts, CDs and money market accounts, up to $250,000 per ownership category per person within a single financial institution. Credit unions receive deposit insurance from the National Credit Union Administration (NCUA), up to $250,000 per owner, per insured credit union, per account category.

One checking account should suffice for most shoppers. However, there may be instances where you’d want to open multiple checking accounts to help keep your finances organized or separated for different purposes.

For example, many small business owners have their own business checking account to segregate their professional finances from their personal finances.

Some parents may even want to open separate student checking accounts to help teach their kids or budding college students financial responsibility and keep track of their finances.

Keep in mind that you can also open joint checking accounts, which make it easier for couples and those who share their lives to also share finances and track spending. With a joint account, two or more people share ownership, and can deposit and withdraw funds from the same checking account.

Every checking account will feature a routing number and an account number. These two numbers are associated with your bank account and serve as unique identifiers for your account.

The routing number associated with your checking account is a nine-digit string of numbers that identifies the institution that manages your checking account.

Your bank account number identifies your personal account and is the unique identifier that your bank uses to direct cash or wire transfers, track your balance, and rout payments as needed.

A second-chance checking account is a type of checking account available to those who might not otherwise qualify for a traditional checking account due to their credit or ChexSystems history.

It may be worth exploring a second-chance checking account if your banking history might have been blemished by closing an account with a negative balance or outstanding fees.

Typically, second-chance checking accounts have lower spending limits, fewer features and may charge monthly maintenance fees. However they exist mainly to assist people who are determined to get their financial lives back on track. Once you’ve had the chance to rebuild your credit history, you may be able to trade back up for a standard checking account.

What should I look for in a checking account?

When shopping for a checking account, keep in mind that their main purpose is to provide a convenient and safe place to stash the x you use for your daily spending. With that in mind, factors such as safety, ease of use and minimal costs should be top-of-mind. You want features like zero fees, a wide ATM network, Federal Deposit Insurance Corporation (FDIC) insurance and overdraft protection. Some checking accounts offer interest or other rewards — these accounts are your best bet.

Find an account with few or zero fees

There are many checking accounts that charge little to no fees. Online banks, in particular, offer checking accounts with zero fees, as they are able to save on the operational costs that burden brick-and-mortar banks. Some checking accounts even offer unlimited ATM-reimbursements or a monthly allowance for reimbursable ATM surcharges.

Since many checking accounts offer little to no interest, it’s even more critical to opt for an account with minimal fees. Common checking account fees include:

  • Maintenance fees
  • Minimum balance fees
  • ATM fees
  • Overdraft fees

Even if you’re using a high-yield checking account, why pay your bank fees for access to your own cash? It’s a good idea to check for bank fees when shopping for a checking account. If your checking account has any monthly balance or spending requirements, make sure you stay within those limits to avoid any unnecessary fees.

Pair your checking account with a high-yield savings account

You might want to pair your checking account with a high-yield savings account if you’d like to maintain your day-to-day spending but stash away a portion of your cash to earn a higher rate of return in longer-term savings.

This is also a great option for those who don’t want to be tempted with the ability to easily spend their savings on everyday needs.

If this is what you’re looking for, start by finding a checking account that fits your daily spending needs, is easily accessible and FDIC-insured. You can then track your spending and set up regular deposits into a separate, high-yield savings account for any excess cash you don’t spend. Keep in mind that not all savings accounts are created the same, and it’s worth shopping around for the best rates when it comes to your savings account.

If you want your money to do more for you with less maintenance, online checking is the way to go.

Resist the urge to hoard cash in a checking account

With easy access, low fees and the safety of FDIC insurance, it can be tempting to use checking accounts as a place to hoard all of your cash. However, checking accounts generally offer much less interest than high-yield savings accounts which makes them a poor store of value.

Keep in mind that deposit accounts will typically pale in comparison to any returns you can reap from investing your extra money in the market. It’s a good idea to keep just enough in your checking account to cover your daily needs, meet any minimum balance requirements and avoid any possible overdraft charges. To get the most out of your money, consider storing any cash you don’t need in a separate high-yield savings account or CD.

There are two main reasons your money would be better off not sitting in checking:

#1 You could miss out on higher interest rates
Interest rates on checking accounts are generally pretty pitiful. Even when they seem high (perhaps 0.60% or even 1.00%), there can be a lot of hoops to jump through in order to secure that interest rate. Instead, consider putting your money into one of the nation’s best savings accounts,best money market accounts or CDs. Your money can easily earn 1.00% or more with those accounts.

#2 You don’t want to give fraudsters access to your life savings
Fraud is another reason you may want to keep a minimal amount in checking. Bank fraud is so prevalent you’ll likely get smacked by it at some point. For credit card users, it isn’t as worrisome because the money charged to a credit card isn’t coming directly out of your bank account and credit issuers commonly offer zero fraud liability protection. On the other hand, debit card fraud means a crook gains direct access to your account and can be draining your actual funds in real time. By not keeping a ton of money in checking, you can reduce the damage a thief can do.

If your card is stolen and you report it to your bank within two days, you can be responsible for up to $50 of unauthorized charges. Waiting longer than two days can make you responsible for up to $500 in unauthorized charges. Additionally, if you notice any unauthorized charges on your account statement, you have 60 days to tell your bank to avoid liability for following transfers. Even if your bank reimburses you for the funds, it’s still a hassle to spend days — even weeks — without having access to that money.

Other Options Besides Checking Accounts

Consider a cash management account

Cash management accounts are a relatively new type of money management account that has become increasingly popular. These accounts are a hybrid of both checking and savings accounts while offering features common to both.

Cash management accounts can offer the convenience and liquidity of checking accounts, plus the interest earnings of high-yield savings accounts. Some cash management accounts feature separate checking and savings accounts under one banner, with instant and unlimited transfers between the two. Others comprise a single account featuring both a competitive interest rate and unlimited liquidity.

Before you go running for the best of both worlds, it’s important to note that not all cash management accounts offer the same FDIC-insurance carried by checking or savings accounts offered by most major banks. This can subject you to some level of risk that you might not necessarily face with a typical FDIC-insured checking or savings account.

Consider hybrid savings/checking accounts

In today’s competitive savings rate atmosphere, some banks are offering the best of both a checking and savings account in the same product, like the Simple Checking Account + Protected Goals Account, our top pick above. These hybrid accounts offer the flexibility of a checking account by including a debit card and avoiding the six-transaction limit of savings accounts. Some accounts might also offer the ability to write checks through the account (however, Simple does not).

Even better, these hybrid accounts also offer the high-yield competitive rates of a savings account (think above 2%!). Opening this kind of account can prove to be a great addition to your savings profile, especially since most checking accounts tend to offer unremarkable rates. Simple goes even further by helping you save towards a specific Savings Goal instead of just earning a high interest rate — although saving at least $2,000 towards that goal enables that high rate.

Of course, money market accounts are already known as hybrid-like accounts with high interest rates. But without limiting your transfers and transactions to six per cycle, these new checking/savings hybrid accounts (or cash management accounts, as they might be called) are able to set themselves apart from money market accounts. Money market accounts also tend to require much higher balance limits and charge monthly service fees, unlike these new accounts we’re starting to see.

promo-checking-wide-v2

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

Earning Interest, Eliminating Fees, Reviews

Schwab High Yield Investor Checking Account Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The Schwab Bank High Yield Investor Checking account offered by Charles Schwab Bank isn’t your average checking account. In fact, it’s a checking account designed exclusively for investors. If you want the convenience of having your idle cash and invested assets all under one roof, this product could be for you.

What is the Schwab Bank High Yield Investor Checking account?

The Schwab Bank High Yield Investor Checking account is an interest-bearing checking account that is linked to your Schwab One brokerage account, making it easy and convenient to invest otherwise idle cash.

This product comes with attractive features that many traditional checking accounts offer — including no minimum balance requirements, no monthly service or ATM fees and a variable interest rate — as well as the unique feature of easy transfers to and from your linked brokerage account. When you open your High Yield Investor Checking account, a Schwab One brokerage account will also be opened for you. The accounts will have separate account numbers, but both can be viewed online with a single login.

Here’s what you can expect to receive upon opening and funding a Schwab High Yield Investor Checking account:

  • 0.03% APY
  • Federal Deposit Insurance Corporation (FDIC) insurance
  • Free transfers to and from your linked brokerage account
  • Schwab Bank Visa Platinum debit card
  • Complimentary checks, deposit slips, mailing labels and pre-addressed, postage-paid envelopes

How is the High Yield Investor Checking account different from other checking accounts?

In most cases, checking accounts do not require you to open another linked account in which funds will flow to and from. The Schwab High Yield Investor Checking account, however, is only available as a linked account with the Schwab One brokerage account.

If you’re in the market for just a checking account to stash the cash you use for your everyday spending needs, opening a brokerage account alongside your checking account can seem like an unnecessary step. The brokerage account’s main function is to trade stocks, options, bonds, mutual funds, ETFs and other financial products.

However, it is worth noting that the Schwab One brokerage account does not have any minimum balance requirements or requirements to fund the account, making it relatively accessible and easy to open.

Schwab Bank High Yield Investor Checking account fees and minimums

The Schwab Bank High Yield Investor Checking account features the following fees and minimums:

Monthly service fee

$0

Minimum balance fee

$0

ATM fee

Unlimited ATM fee rebates

Foreign transaction fee

$0

It’s worth noting that while the Schwab One brokerage account also does not have any minimum balance requirements or monthly maintenance fees, other account fees may apply. For example, trades placed through a broker come with a service charge of $25.

Schwab High Yield Investor Checking account pros and cons

Pros

  • Easy to invest idle cash: By having your checking account linked to your brokerage account, it makes it much more convenient to invest any idle cash.
  • Minimal fees: Schwab’s High Yield Investor Checking account boasts minimal fees compared to other checking accounts, specifically ones offered by other big banks.
  • Unlimited ATM rebates: This is a valuable feature and could save you a significant amount of money over time.

Cons

  • Low interest rate: The account’s 0.03% APY pales in comparison to other high-yield checking accounts, some of which have rates that climb to over 5.00% APY.
  • Unnecessary complexity: The requirement of having a Schwab One brokerage account could be viewed as an added hoop to jump through for those simply looking for a traditional checking account product.
  • Non-sufficient funds fee: Watch out for the account’s non-sufficient funds (NSF) fee of $25, up to $100 maximum per day, if you don’t have enough money in your account to cover a transaction. Still, this is less than the average NSF fee of $30.50.

Who is the Schwab Bank High Yield Investor Checking account good for?

If you’re just looking for a liquid checking account that you can use for your everyday spending needs, the Schwab High Yield Investor Checking account is likely not for you. There are other checking accounts offering much higher interest rates without requiring you to link a brokerage account in order to open the account. Additionally, if your strategy is to let your extra cash sit in the Schwab High Yield Investor Checking account without initiating regular transfers to your Schwab One brokerage account, your money would grow at a considerably faster rate in a high-yield savings account, money market account or CD.

If you already are an investor and have a Schwab One brokerage account — or are looking for a checking account that provides easy and instant transfers to and from your brokerage account — the Schwab High Yield Investor Checking account is certainly worth exploring. It has many of the same, standout features that the best traditional checking accounts have, while also being one of the few checking accounts out there that provides instant access to your invested assets.

promo-checking-wide-v2

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

College Students and Recent Grads, Eliminating Fees, Life Events

When to Avoid a Company 401k

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Man Paying Bills With Laptop

Gone are the days of workers depending upon pensions when they retire. Today, instead of offering defined benefit pensions guaranteeing an employee a monthly payment for the rest of his or her life, employers are moving to more employee-managed retirement savings plans.

Today, more employers offer a 401k plan – if they have an employer-based plan at all. With a 401k, employees make a defined contribution from their income each year. With a pension plan, employees knew exactly how much income they could depend on each month during retirement. Now, it is up to the employees to determine how much they need to save in order to reach their retirement savings goals.

A 401k allows employees to make defined contributions, pre-tax (or post-tax), towards retirement. If you contribute to a traditional 401k, contributions are automatically deducted from your paychecks each pay period, pre-tax. As a result, you don’t pay taxes until money is withdrawn from the account and you cannot withdraw money before 59 ½ without penalties. Some employees offer the option to contribute post-tax in a Roth 401k, so money withdrawn in retirement will not be taxed.

With this change toward employee-directed retirement, rather than retirement guaranteed by the employer, it is up to you to make the best decisions regarding your retirement savings. This could mean it’s best to avoid a company 401k.

Take a look at these situations in which you should not pay into your employer’s 401K, and see if any of them apply to you.

No Employer Match

Many employers provide a match to their employees’ 401k contributions. Employer matches vary greatly by employer, but a common example of this is $0.50 per $1.00, up to 6% of employees’ pay.

Let’s say you earn 40,000 per year at your current job, and your employer provides a $0.50 per $1.00 match, up to 6% of your pay. If you were to contribute the full 6% of your pay annually, you would contribute a total of $2,400 to your 401K over the course of a year. Your employer would then contribute $0.50 for every dollar you contributed, for a total of $1,200 for the year.

In total, over the course of the year your 401K would contain $3,600, and you only would have contributed $2,400 of the balance.

But if your employer does not provide a match, it may be time to reconsider contributing to its 401K plan. Never walk away from an employer match, as it is basically free money, but if your employer does not provide a contribution match, it may be time to consider other options like saving for retirement in a traditional or Roth IRA.

You Have Reached The Contribution Limit

Effective January 1, 2020, the 401k contribution limits are $19,500 if you are age 49 and under. If you are 50 or older, you can contribute an additional $6,500 above and beyond the $19,500 regular contribution, for a total of $26,000. Of course, you are free to contribute less to a 401K, but saving as much as possible for retirement is always best.

Once you have reached the contribution limit on your 401k, you cannot make any more contributions pre-tax, and it is time to consider alternative investments.

One good alternative is a Traditional IRA. Contributions are made to a traditional IRA after tax, meaning that you pay taxes, and then make contributions out of your paycheck. For 2020, individuals can contribute up to $6,000 per year to a traditional IRA if they are 49 and under. You can contribute up to $7,000 per year if you are 50 or older.

Another solution for aggressive savers is a taxable account such as stock index funds. When using taxable accounts such as these, you can expect to pay 15% on long-term gains and qualified dividends. Additionally, contributions to these plans are made after-tax. However, the benefits of using accounts such as these include being able to withdraw from them for things such as children’s college expenses before age 59 ½ without additional penalties and fees.

You Qualify For a Roth IRA

If you employer does not offer a 401k match – or a 401k plan at all – and you meet income thresholds, then a Roth IRA may be an excellent option for your retirement savings.

A Roth IRA allows individuals whose modified adjusted gross income, which you can calculate at the IRS website, is less than $139,000, or married couples whose income does not exceed $206,000 to contribute to their retirement.

A Roth IRA is different from other accounts, though, because of the way taxes are handled. Contributions are made after tax. However, once the initial contribution is made, you enjoy tax-free growth as long as you follow the rules:

  • 49 and under can contribute a maximum of $6,000
  • 50 and over can contribute up to $7,000
  • You can withdraw your contributions (not growth) at any time without penalty

How much can a Roth IRA save in taxes? If you contribute $5,500 per year to a Roth IRA for 40 years, and your marginal rate is 15%, this is what your account’s growth could look like over the course of 40 years:

401k_1

In this scenario, you would have only paid in $230,000 during the entire 40 years you worked. You would have paid $34,500 in taxes from your paychecks.

However, your relatively small investment could grow to $1,189,636 – and you will not have to pay taxes on any of that balance when you withdraw it. If your marginal tax rate stayed at 15% when withdrawing money from your Roth IRA, you could save more than $143,000 in taxes alone.

See how much money you can save with a Roth IRA, and how much money it can save you in taxes here, with Bankrate’s Roth IRA calculator.

High Fees

If your employer offers a 401k without a match, a good way to gauge whether it is a good investment vehicle for your retirement savings is to take a look at the fees. Many times both employees and employers are unaware of just how much fees are costing them. After all, 3% seems like such a small number, doesn’t it?

3% may feel like a very small amount to pay in fees, but this example will show you just how much a small percentage can affect your retirement savings.

401k_2

In this example, the investor is a 29 year old, contributing $18,000 per year to her company’s 401k, and her retirement age will be 65. The current balance of their 401K is $100,000, and fees are 3%.

Just by switching to a plan that cuts fees in half, 1.5%, she could save $801,819.03. Instead of having $1.8 million upon retirement, she could have more than $2.6 million – making for a much better retirement.

You can check out a fee calculator here and find out just how much your fees are costing you!

Even if your 401k has high fees, be sure to consider the employer match. Many times the match will more than cover the fees, making the 401k a good investment vehicle in spite of the high fees.

If You Need Flexibility

401k’s, while they offer tax advantages, and often free money through the form of an employer match, do not offer any sort of flexibility. Contributions are automatically deducted pre-tax from an employee’s paycheck in pre-set amounts, and cannot be withdrawn without serious penalties until age 59 ½.

For many families, saving and investing money is not just about retirement. It is about college, medical expenses, large purchase, and even vacations. Always contribute to your 401k up to the maximum amount that your employer will match, but if no match is available and you need flexibility for other savings priorities, check out some of these options:

A 529 Plan: An education savings plan operated through your state or an educational institution to help families set aside income for education costs. Although contributions are not deductible on your federal income tax return, the investment grows tax-deferred, and distributions used to pay the beneficiary’s college costs come out tax-free. Some states offer tax breaks for 529 contributions, you can find yours here. In addition, there are very few income and contribution limitations, making the 529 plan a great, flexible way to save for college.

A Health Savings Account: An HSA offers individuals and families the opportunity to save money exclusively for medical expenses, and contributions are 100% tax deductible from gross income. For 2020, individuals can contribute up to $3,550, and families are allowed to contribute up to $7,100. HSA accounts holders age 55 and older can contribute an extra $1,000. If using savings for medical expenses if a priority, talk to your employer about an HSA. Not all insurance plans are eligible.

Taxable Investment Accounts: When saving for large purchases or vacations, more flexible accounts are better. As explained above, index funds, mutual funds, or even traditional savings accounts leave the account holder with more of a tax burden, but far greater flexibility for withdrawals. These accounts do not need to be opened through your employer, but can be opened and managed on your own, or with the help of a financial planner.

If your employer offers a contribution match, they are essentially offering you free money, so go ahead a take advantage of the 401k, regardless of high fees or a low income. However, if your employer offers no match, high fees, or you have reached the yearly contribution limit, then it is a good idea to avoid that 401k plan and look into other retirement savings options.

At the end of the day, saving for retirement or other goals is all about you. How much flexibility you need, how much you need to save, and your tax situation. Be sure to weigh all of your options to guarantee that you are making the best decision for you and your family.

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