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Updated on Tuesday, January 14, 2020
A deposit account is an account at a bank or credit union that allows you to safely and easily manage your money. Deposit accounts fall into two major categories: demand deposits and time deposits.
Demand deposit accounts, which include checking and savings accounts, may let you withdraw up to the full amount of your savings at any time without gaining permission from the bank or credit union. Time deposits, like CDs, restrict your access to funds for a set time period.
What are the types of deposit accounts?
The two key features of deposit accounts
All deposit accounts offer two primary features: security and interest.
When deposited into an insured financial institution, your money is protected in the event of bank failure up to the legal amount per account by the Federal Deposit Insurance Corporation (FDIC), or up to the legal amount per credit union account by the National Credit Union Administration (NCUA). Joint accounts with two account owners get double the protection from the FDIC or NCUA. You can find out if the bank you’re considering is insured by the FDIC here.
You’re not just putting money into a deposit account to keep the funds safe — you also want to be rewarded for letting the bank hold your money. After all, banks and credit unions use funds held in deposit accounts to make loans to other customers, and earn profits. Interest payments is how banks and credit unions reward their deposit account customers, and incentivize them to keep funds in their accounts.
The longer you leave your money and earn interest in the bank, the greater the interest the account will earn. This is called “compound interest.” Depending on the bank and the account, interest may compound on a quarterly, monthly, weekly or daily basis. The more often interest compounds, the faster your balance grows.
When comparing prospective deposit accounts, you’ll want to review the annual percentage yields (APY). The APY advertised by your bank or credit union is the amount of interest you’ll earn in one year — the APY factors in the interest rate on the account as well as how often it compounds, so comparing APYs is the best way to compare the earning potential of different accounts.
Features of the main types of deposit accounts
These are the five main kinds of deposit accounts — let’s take a look at how they work and when you need them.
Checking accounts are demand deposit accounts that let you deposit or withdraw money whenever you want. A checking account provides easy access to your money via paper check, ACH transfer, debit card, or cash withdrawal at a branch or ATM.
Some checking accounts pay interest, with our list of best accounts available paying upwards of 4.00% APY or more, as long as minimum balance requirements are maintained. But note that many checking accounts pay minimal or even zero interest, and regulations do not require institutions to offer interest payments on checking accounts.
Checking accounts may charge fees, including monthly maintenance charges; however, fees may be waived if you maintain a minimum balance or set up recurring direct deposits. You can be charged for money orders or cashier’s checks, and there may be limits on the amount you can withdraw in a given day or per ATM visit. Writing checks or swiping your debit card for amounts you don’t have can result in costly penalties like overdraft fees, insufficient-funds fees, or returned-check fees.
When to open a checking account
- Checking accounts are one of your most important personal finance tools. This is where you manage the money you earn and spend on a day-to-day, week-to-week basis.
- If you’re earning a low APY or earning no APY on your checking account, now might be the right time to examine your options. There are plenty of high-yield checking accounts available on the market today.
- Look for checking account with zero fees. There are simply too many zero-fee options for you to be paying monthly account fees for your checking account.
Savings accounts are demand deposit accounts that offer interest on your balance. Interest may be compounded daily, weekly, monthly, or annually. The benefits of savings accounts can vary widely based on requirements for a minimum opening deposit, monthly service fees, interest rates, and how the interest is calculated.
Savings accounts aren’t meant to offer the ease and frequency of access you get with checking accounts, but some do offer debit cards and even checkbooks. The Federal Reserve’s Regulation D mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. If you exceed your transaction limit, the bank may charge you a fee, close your account or convert it to a checking account, so check with your bank about requirements and penalties.
When to open a savings account
- You may want to look into moving your savings into a high-yield savings account if you can get a better rate than what you’re earning with your current savings account.
- When considering a new savings account, look for the highest possible APY you can find — most often, that means looking at our list of online savings accounts, which we have found consistently offer the best rates in the business.
- Skip accounts with any monthly maintenance fees, as they eat into your returns. Also keep an eye on minimum balances to earn the highest possible APY.
Money market accounts
A money market account (MMA) is a high-yield deposit account that offers interest rates very similar to those offered by savings accounts. Money market accounts often provide access to your funds via debit cards or checks. However, like savings accounts, they too are subject to Regulation D which mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. You should check with your credit union or about any transaction limits and potential penalties. Minimum deposit requirements for MMAs are frequently higher than those for savings accounts.
When to open a money market account
- Money market accounts have many of the same benefits and restrictions as savings accounts. MMAs generally require higher minimum deposits to open than savings accounts, and in exchange for that, you may be able to secure a higher APY. If you have a large sum you wish to keep as a liquid asset, a money market account may be your best option.
- If you need easy access to your funds, a debit card or even a checkbook can be reasons to choose an MMA — although many savings accounts offer these conveniences as well.
- Like with savings accounts, you need to understand the minimum balance required to earn the account’s highest advertised APY.
Certificates of deposit
Certificates of deposit (CDs) offer a way to earn higher rates of interest than those offered on savings accounts. CDs are time deposits, with common terms between one month and ten years. With a CD, you cannot withdraw money before the CD matures without incurring a penalty.
Penalty rates vary across the industry and by CD term length, but penalties generally amount to losing some or most of the interest you’ve earned on your investment at the time you withdraw. The interest rates are fixed over the term of the CD. The CD may automatically renew upon the maturity of the original deposit, so check with your bank or credit union for details.
CDs are insured by participating institutions up to the legal amount per account, per institution by the FDIC for banks and the NCUA for credit unions. Larger principal deposits and longer terms may fetch more competitive rates, although investors need to be sure they are comfortable losing access to their money for long durations.
You can stagger multiple CD maturity dates to create a CD ladder as a way of maintaining liquidity, capitalizing on increasing rates, and hedging against falling rates.
When to open a certificate of deposit
- CDs are only a good option if you don’t need access to your money for whatever term you choose — either a short-term certificate with a term numbered in months, or a long-term CD lasting years.
- Some CDs offer higher interest rates than savings accounts. Again, though, you must be prepared to leave your funds untouched for the term of the CD. Beware of high penalties for early withdrawals, before the end of the CD’s term.
- Locking your money up in CDs could be a good strategy when market interest rates are falling: You can maintain a higher APY while other deposit accounts see declining rates. Conversely, they might not be the best choice when market rates are rising: By locking in a CD, you might miss out on higher APYs on other deposit accounts from higher rates.
Individual retirement account CDs
Individual retirement accounts (IRAs) are tax-advantaged vehicles designed to help people save for retirement. With an IRA CD, you may use funds saved in your IRA to invest in designated CD products. Credit unions, banks and brokerage firms offer IRA CDs, available as either traditional IRAs or Roth IRAs.
IRA CDs share most characteristics with regular CDs. IRA CDs may renew automatically like traditional CDs, so it’s important to keep track of your CD maturity dates so you can make educated investment decisions when the CD term ends. Keep in mind that deposits into an IRA account are subject to annual IRA contribution limits.
Like regular CDs, IRA CD investors need to beware of early-withdrawal penalties. Not only are there penalties for withdrawing from the CD before it matures, but if you remove the funds from your IRA, there is an IRS tax penalty of 10% on any distribution you take before you reach 59½ years of age. Still, the IRS may waive early distribution penalties for certain situations, such as a withdrawal of funds applied to a first-time home purchase.
When to open an IRA CD
- IRA CDs are a great option for conservative retirement investors who want a decent rate of interest, without exposure to volatile stock or bond markets.
- Unlike stock and bond investments in IRAs, IRA CDs are insured by the FDIC and NCUA up to the legal amount per account, per institution.
- Like standard CDs, IRA CDS prevent you from accessing principle for whatever term you choose.