7 Types of Savings Accounts
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Summary:
The type of savings account you want to open depends on your financial goals and current financial situation. You can find savings accounts in various financial institutions, from brick-and-mortar banks to online services. Different accounts offer different benefits and restrictions, and you might consider opening multiple accounts to meet your needs.
Saving accounts are useful for storing money that you don’t need in the near future. You may choose to open a savings account to have money in case of an emergency job loss or to move into a new apartment. We recommend reading more to better understand the benefits of opening a saving account.
However, not all savings accounts are the same. Some have restrictions as to when you can access funds, and others may help you make money on your savings by building interest. You have many options to consider, so let’s discuss their similarities and differences.
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Types of savings accounts
You may be wondering how to begin the sorting process of types of savings accounts. There are many options, and it may seem overwhelming. According to Certified Financial Planner Kendall Meade at SoFi, these are the top 3 things you should look at when evaluating the types of savings accounts:
“1. Account Fees: Some accounts may have monthly or annual account fees that can add up.
2. Account Minimums: Some banks may require that you keep a minimum balance at all times.
3. Accessibility: Different banks also approach what types of transactions are allowed and how often transactions are allowed in savings accounts.”Click to Tweet
2. Account Minimums: Some banks may require that you keep a minimum balance at all times.
3. Accessibility: Different banks also approach what types of transactions are allowed and how often transactions are allowed in savings accounts.”Click to Tweet
Are savings accounts safe?
Worrying about the safety of your funds in a savings account is common. Most savings accounts are associated with financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). For these accounts, your deposit is insured up to $250,000 per account ownership category. In case of bank failure, the FDIC will protect your money up to this amount.
Pro tip
Given that your money will only be insured up to $250,000, we recommend never putting more than $250,000 in each type of savings account with each bank. Consider a sweep account if you have excess funds.
Regular savings accounts
Savings accounts of the most common type, regular savings accounts, are found at banks and credit unions, so if you already have a savings account with your bank, such as Chase Bank, it is probably this account type.
The benefit of a traditional savings account is easy access to cash with only minor restrictions. For example, your bank or credit union may set a minimum daily balance, with small monthly fees if you go below that balance. We recommend using SuperMoney strategies to determine how much cash you should have available.
Additionally, until 2020, there was a federal regulation on the number of monthly withdrawals to six times per month, with any withdrawal after that incurring a penalty. While this regulation ended in 2020, individual banks often still enforce a maximum withdrawal limit.
Regular savings accounts have an additional benefit of earning a small interest on your savings. This interest is known as annual percentage yield (APY). Traditional savings accounts have lower rates than most other savings, typically around 0.01% APY. For example, a savings account with a $1,000 balance and 0.01% APY would earn 10 cents annually.
High-yield savings accounts
High-yield savings accounts are similar to regular savings accounts but with higher APYs, which can help you grow your savings faster.
A high-yield savings account often exists at online banks and online credit unions. An online savings account is an accessible resource for storing funds that can be accessed anytime using your phone or computer.
Although they are not brick-and-mortar traditional banks, online banks that are members of the FDIC are safe and trustworthy.
As well as offering higher interest rates, online banks typically have fewer fees. For example, there may be no minimum daily balance requirement or monthly service fees.
Certificates of deposit
A certificate of deposit, or CD, differs from a standard savings account in that you allow the bank to keep your money for a specified amount of time. CD terms typically range from three months to five years, and during this time, you cannot withdraw funds, or you must pay a fee.
In return for allowing the bank to lock up your money, CDs often have higher APYs. These high-interest-rate savings accounts are an excellent option for individuals who have long-term saving goals. As the term progresses, your money earns interest; thus, you can withdraw even more than what you started with.
However, CDs are not great options for those needing emergency funds. You will incur an early withdrawal penalty if you withdraw your money before the maturity date.
Both traditional and online banks offer CDs. In the same way online savings accounts offer higher interest rates for high-yield accounts, online banks typically offer higher CD yields.
Pro tip
Creating multiple CDs staggered with different maturity dates will allow you to access money more regularly. This strategy is called CD laddering!
Money market accounts
Money market accounts (MMAs) integrate the interest rate benefits of savings accounts with the accessibility of checking accounts. MMAs are available at traditional and online banks.
Similar to a checking account, money market accounts come with a checkbook and a debit card to easily access funds. However, many banks impose withdrawal caps similar to traditional savings accounts at six monthly withdrawals. In this way, although MMAs are more flexible than conventional savings accounts, they still limit purchases.
Money market accounts offer higher interest rates than regular savings accounts but lower rates than CDs or high-yield savings accounts. MMAs offer tiered interest rates, meaning those with more savings will earn a higher interest rate. Additionally, MMAs typically require larger starting balances above $1,000 to avoid monthly maintenance fees.
Cash management accounts
Cash management accounts (CMAs) are neither designed for savings nor offered by banks. Instead, nonbank financial institutions such as brokerages, robo-advisors, and investment firms provide cash management accounts.
These accounts suit those who are planning on using funds to invest. The money in the account will earn interest at a similar, or slightly lower, rate than a standard savings account.
Because CMAs distribute your funds between multiple financial institutions, your FDIC coverage extends beyond the typical $250,000 limit, which benefits those with a lot of money to save.
Specialized savings accounts
Specialized saving accounts help individuals reach specific goals, such as saving for college or retirement. These accounts may also benefit particular individuals, such as kids or college students with modest funds. According to Certified Public Accountant and Billpin’s founder James Allen, high-yield savings accounts can be an excellent option for this demographic:
“For recent college grads, I'd suggest a high-yield savings account to help your money grow faster for goals like travel, cars, or relocation. For kids, high-yield savings accounts and CDs are safe options that teach compound interest and motivate continued saving through account growth.”Click to Tweet
We will review two of the most popular specialized savings accounts. Still, we recommend checking with your financial institution to see what they offer for kids, college students, and those looking to save for higher education. Learn how to budget and save smartly, even on a low income.
Health savings accounts
Health savings accounts (HSAs) are specialized savings vehicles that allow you to save money for only one purpose: to pay medical expenses. Both you and your employer can contribute funds to the account.
You must enroll in a high-deductible health plan to qualify for a health savings account. Contribution limits may change yearly; in 2023, individuals can contribute up to $3,850 per year and families up to $7,750 per year. Individuals over 55 can contribute an additional $1,000 per year.
Benefits of HSAs include fund rollover to future years to save for medical expenses, which incentivizes maxing out your yearly contribution. Additionally, HSAs avoid federal income tax.
IRA and Roth IRA
These savings options are generally considered best for retirement savings and have substantial tax advantages. Per year, your contribution is capped at $6,000 to each type of IRA, traditional and Roth IRAs, unless you are over 50 and can contribute up to $7,000 per year per IRA account. Typically, you can only access these funds after the age of 59 1/2 without paying a fee.
The big difference between a traditional IRA and a Roth IRA stems from how they offer a tax advantage. A traditional IRA allows you to contribute pre-tax dollars, which means you will have to pay income tax when you withdraw the funds at age 59 1/2. On the other hand, a Roth IRA allows you to contribute after-tax funds, so your withdrawal will be tax-exempt when you withdraw at age 59 1/2.
FAQ
How many savings accounts can you have?
While there is no limit to the number of savings accounts you can have across all banks and financial services, individual banks may limit the number of accounts an individual can have.
How do high-yield savings accounts work?
High-yield savings accounts offer higher interest rates because online banks and credit unions use their savings from lower operating costs to deliver competitive rates.
How do I apply for a savings account?
Each bank and financial institution will have its own requirements for how to apply for a savings account. We recommend you start with the bank where you have a checking account to evaluate their savings account options.
What type of savings account should I open?
The type of savings account that works best for you depends on your current financial income and short- and long-term financial goals.
What does APY mean in a savings account?
APY, or annual percentage yield, is the interest you earn on your savings. APYs range from below 1% to up to 5%, depending on the type of account.
Where is a savings account on the balance sheet?
The combined total of your checking and savings accounts is shown under cash and cash equivalents in the assets section of the balance sheet.
Key takeaways
- Savings accounts vary in interest rates, monthly fees, minimum daily balance requirements, how to deposit funds, and accessibility. Consider all types of savings before committing!
- Savings accounts are a great way to reach your personal finance goals. Savings account options with high interest rates may help you achieve those goals faster by building on your savings.
- Savings accounts backed by the FDIC are safe and protect your funds up to $250,000. Traditional and online banks can be members of the FDIC, which gives you flexibility regarding where you want to store your money.
Further reading: SuperMoney has many tools to evaluate your saving account options, including this recently updated best savings accounts article.
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