Which Kind of Savings Account Is Right for You

Understand 15 different savings account types for near-term expenses, long-term retirement, health care expenses and a variety of other needs.
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agent giving advice on types of savings accounts to Her new client

Saving money is always tough, but job losses and stock market setbacks resulting from the coronavirus outbreak have made it even tougher.

Fortunately, whether you are saving for near-term goals or your long-term retirement, you have several tools at your disposal.

Understanding the different savings account types that are out there can help you choose the right tool for the task at hand. Here are 15 different savings account types to learn about…

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15 Savings Accounts that Can Help You Save

1. Deposit savings accounts

These are basic savings vehicles offered by banks and credit unions. A standard savings account typically has five key features:

  • Stable value Money in these accounts cannot lose value, so you can count on it being there when you need it.
  • FDIC protection Your deposits in a savings account are FDIC protected. This protection provides up to $250,000 of insurance across all of a depositor’s accounts at any one institution. If your savings account is offered by a credit union, it is similarly protected for up to $250,000 by the NCUA.
  • Immediate access Savings account deposits are fully liquid, meaning that you can withdraw your money at any time, without advance notice.
  • Earns interest Besides safety and liquidity, savings accounts typically earn interest. These interest rates can vary widely, so you can earn more interest if you shop around for the highest savings account rate.
  • Transaction limits While you can withdraw your money at any time, savings accounts do not permit more than six transfers per month to another account or to another party.

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2. Money market accounts

Money market accounts share the above characteristics with savings accounts. They may offer additional features such as check-writing, but are still limited to six transactions per month.

Money market interest rates are generally very similar to savings account rates. However, while money market accounts can be used in the same way as savings accounts, they are funded differently by the financial institutions offering them.

This difference in approach means that sometimes money market accounts are generally paying higher interest than savings accounts, and sometimes the opposite is true. That’s why it is wise to include both savings and money market accounts when you are shopping for the best rates.

3. Jumbo savings accounts

Jumbo accounts are ones that pay higher interest in exchange for larger account balances.

Traditionally, $100,000 has been the threshold for something to be considered a jumbo account. However, banks sometimes offer preferred interest rates at different account balance thresholds. The same may apply to jumbo money market accounts and jumbo certificates of deposits (CDs).

In recent years, banks have been offering relatively little extra reward for larger deposits, if any. However, when shopping for rates it is always a good idea to compare rates that apply to the size of deposit you have in mind.

4. High-interest savings accounts

A high-interest savings account is no different from an ordinary savings account, except that it pays a significantly higher rate of interest.

The savings accounts offered by most banks usually offer fairly similar interest rates. However, there are generally a few institutions offering much higher rates than the industry average.

This opportunity to find a much better than the average rate is what makes shopping for rates worthwhile. Also, note that sometimes you can qualify for a better interest rate with a larger deposit.

5. Rewards savings accounts

These are the same as ordinary savings accounts, except the bank will give you an extra reward for doing business with them.

The reward may take the form of cash or a gift. What you have to do to earn the reward depends on the bank. It may simply involve opening a new account with them, though often you are required to deposit a certain amount of money or set up direct deposits into the account.

Note that these rewards are often one-time deals. Compare the value of the reward with how much more interest you might earn in a different account. The reward may not be worthwhile if it means earning less interest in the future.

6. Joint savings accounts

This is simply a savings account owned by two or more parties. An important advantage of setting up a joint savings account is that it increases the FDIC insurance on the account.

The $250,000 FDIC insurance limit is multiplied by the number of owners of a joint account. So, a couple opening up a joint account would be entitled to $500,000 (2 times the $250,000 individual limit) of FDIC insurance.

7. Student savings accounts

These are savings accounts offered to young people enrolled in high school or college. They may offer special terms, such as fee waivers or lower minimum balance requirements.

A student savings account is an ideal place for young people to keep their earnings from a summer job or money from holiday and birthday gifts. Money kept in a bank account is less likely to be spent carelessly than money kept at home.

On top of that, a savings account earns interest. Also, having a bank account is an opportunity for a young person to learn important personal finance principles such as how to compare rates and fees from different banks and how to keep financial records up to date.

8. Certificates of deposit (CDs)

Part of the appeal of savings account is that it allows immediate access to your money. But what if you are confident you won’t need that money for months or even years to come?

In that case, you could probably earn more interest by putting your savings into a certificate of deposit (CD). This is an account that holds your money for a specified period of time. In return for committing your money for that period, a CD typically pays a higher interest rate than a savings account.

A CD term can be anywhere from a month to several years. The longer the commitment you make, the more interest you typically earn. However, if you withdraw your money prior to the end of the CD’s term, you will probably have to pay a penalty.

9. College savings accounts (529 plans)

Accounts such as 529 college savings plans are designed to pay for educational expenses. These expenses include college tuition and vocational training costs. You can even use them for up to $10,000 in elementary or secondary school tuition or to repay student loans up to that same amount.

Besides tuition, a 529 plan can be used to pay costs that are often associated with pursuing an education, such as room and board, computers, books and school supplies.

Contributions to a 529 plan are not tax deductible, but investment earnings on money in one of these plans are not taxable. However, you will have to pay taxes plus a 10 percent penalty if you use that money for anything other than qualified educational expenses.

10. Traditional IRAs

Individual Retirement Arrangements, more commonly known as IRAs, come in two forms: traditional and Roth IRAs.

A traditional IRA allows you to make a tax-deductible contribution of up to $6,000 (or $7,000 if you are aged 50 or older). Investment earnings on that money are tax-free, though you will have to pay ordinary income tax on money you eventually withdraw from the plan.

You are expected to leave money in an IRA until you reach at least age 59 1/2. If you withdraw money from an IRA before then, you will have to pay a 10% tax penalty on top of any ordinary income tax on the amount withdrawn.

11. Roth IRA

Roth IRAs have the same contribution limits as traditional IRAs. The difference is that contributions to a Roth IRA are not tax-deductible. However, you do not have to pay taxes on money you take out of a Roth IRA once you reach retirement age.

The choice between a traditional or a Roth IRA largely comes down to whether you think your tax bracket will be higher or lower once you reach retirement age. You can choose to pay taxes on IRA contributions now with a Roth IRA, or pay taxes on withdrawals in retirement with a traditional IRA.

12. 401(k) retirement plans

These are employer-sponsored plans that allow you to defer taxes on up to $19,500 (as of 2020) of income for retirement savings. If you are aged 50 or older, you can also defer taxes on an additional $6,500 in 401(k) contributions.

Besides the tax benefit, many 401(k) plans feature contributions from the employer in addition to the money employees choose to put into a plan. 401(k) plans offer a range of different investment options, so you can choose according to your retirement goals and risk tolerance.

Withdrawals from a 401(k) plan are subject to ordinary income tax, plus a 10 percent penalty if you take money out before you reach age 59 1/2.

13. Roth 401(k) plan

A growing number of 401(k) plans are now offering employees a Roth 401(k) option. This is similar in characteristics to a Roth IRA, in that the participant does not get a tax deduction on money contributed to the plan but then does not have to pay taxes when withdrawing from the plan in retirement.

14. 457(b) and 403(b) plans

These are employer-sponsored retirement plans that are similar in characteristics to 401(k) plans, except they are for different groups of employees. 457(b) plans can be set up for employees of tax-exempt organizations or state and local governments. 403(b) plans are for employees of public educational systems.

15. Health Savings Accounts (HSAs)

A health savings account is a deposit product designed to help pay for health care expenses. It allows you to make tax-deductible contributions, grow your money in the account tax-free, and pay no tax on withdrawals as long as they are used for qualifying medical expenses.

To be eligible for an HSA you have to be enrolled in a high-deductible health plan. Money in an HSA can be used to meet year-to-year health care expenses, but it can also be accumulated over time to help you pay for health care in retirement.

Which type of savings account is right for you? It depends on the situation. Most likely, in time, you’ll find yourself using a few different savings accounts, each geared to a specific purpose.

Frequently Asked Questions

Q: I use my 401(k) plan at work, and also have an IRA, both of which I direct towards long-term investments. I have a checking account to take care of my immediate needs, and beyond that, I try to put every penny into my long-term accounts. Is there a role for a savings account in my situation?

A: Someone who is saving for the long-term should be focused primarily on long-term investments. Vehicles like 401(k) plans and IRAs allow you to defer taxes on those investments, which may allow you to keep more of what you make in the long run. However, the price you pay for this preferential tax treatment is a restriction against accessing this kind of account until you approach retirement age. If you withdraw from these accounts before you reach the age of 59 1/2, you will pay a 10% penalty on top of any applicable state, local, and federal taxes.

In addition, tapping into a portfolio of long-term investments unexpectedly can be disruptive and costly. It could force the sale of a security at a bad time, and a sizeable withdrawal could force the rebalancing of the portfolio, resulting in extra transaction costs.

Therefore, the role of savings accounts or money market accounts in a long-term savings program is to act as a buffer, or an emergency fund. Its money you’ve segregated out from your checking account because it is not for routine spending, but it is accessible if absolutely needed, without disrupting your long-term investment plans.

Q: Is there any bank that will accept an account from a U.S. citizen living outside the U.S. without a driver’s licence?

A: If you want to know why you are having so much trouble opening a bank account without a driver’s license, look no further than a story that has been in the news constantly of late because of the 20th anniversary of September 11, 2001: the war on terrorism.

After the attacks, the government put in place stricter anti-money-laundering rules. These were actually an extension of previous rules that had been prompted by the war on drugs, but as with many things, after 9/11 the security net was pulled even tighter.

The new anti-money-laundering rules put in place a “know your customer” obligation, which required that banks verify the identity of their customers. This applies across the board–savings accounts, money market accounts, CDs, checking accounts, you name it.

A lack of a U.S. driver’s license can be an obstacle–it is the most commonly used form of identification when starting a bank account. However, if your driver’s license has lapsed, the best answer might be your passport. Customer service representatives at banks are so used to dealing with driver’s licenses that they would have routinely asked you to produce one, but a passport is considered at least as authoritative as a form of ID. Assuming that as an American living overseas you have an up-to-date passport, ask if the bank will accept it.

Q: I have $25,000 that I need to put into an account, but I’d like to be able to put my hands on it if needed. What do I do?

A: There are three important considerations in choosing a bank account that will give you both stability and ready access to your money:

  1. In theory, money market accounts have an edge. On average, money market accounts offer better interest rates than savings accounts or short-term CDs. According to FDIC figures as of mid-2021, money market rates averaged 0.09% nationally, compared with 0.06% for savings account rates, and 0.03% for one-month CD rates. These numbers are subject to change from week-to-week, but over time they’ve typically fallen into a similar pattern, with money market accounts offering a little more interest than savings accounts and short-term CDs — on average.
  2. Shopping around is vital. The national averages referenced above are useful for providing an overview on the bank rate scene in general, but they are by no means indicative of the rates you need to accept. Rates at different banks vary greatly. In the most recent America’s Best Rates survey, the top money market and savings account rates were several times the national averages. In other words, you can do much better than average by using Internet resources such as MoneyRates.com to shop around. Also, the top savings account rates are often very competitive with the top money market rates, so while money market rates may be higher on average, you should still include both savings and money market accounts in your search.
  3. Under some circumstances, a CD might fit your needs. In theory, your desire for immediate access to your money would seem to eliminate the possibility of considering a certificate of deposit, but there are some circumstances under which a CD might be a good fit. One issue is probability — if you are likely to need quick access to your money, then by all means stick with a savings or money market account. On the other hand, if a pressing need for that access is only a remote possibility, you may be willing to take a chance with a longer-term CD. Another key issue is the early withdrawal penalty. If you can find a longer-term CD with a very mild early withdrawal penalty, the additional interest you could earn may make the possibility of paying that penalty worthwhile.

Interest rates on deposit accounts may not be anything to get excited about these days, but with all the risk in the financial markets, just obtaining the security of FDIC insurance can make savings accounts, money market accounts or CDs an attractive proposition.

Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).