Different types of bank accounts serve different needs. It’s wise to put money into the best account type for your financial goals so you get access to the right tools for spending and saving. Doing so allows you to maximize the return from your bank, minimize fees, and manage your money conveniently.
Most banks and credit unions offer the following account types, which are covered in depth ahead:
- Savings accounts
- Checking accounts
- Money market accounts
- Certificates of deposit (CDs)
- Retirement accounts
Consumers use this type of bank account to set aside money for future use. Since your deposits collect interest, your money grows over time.
Savings accounts are typically the first official bank account anyone opens. Children may open an account with a parent to establish a pattern of saving. Teenagers can also open accounts to stash cash earned from a first job or household chores and manage money while in college.
Opening a savings account also marks the beginning of your relationship with a financial institution. For example, when joining a credit union, your “share” or savings account establishes your membership.
A savings account is an excellent place to park cash for financial goals or emergencies safely and separately from the money you use for ongoing expenses.
- Good for: A first bank account for kids or teens or an account for adults looking for a place to earn interest on savings or park cash they would otherwise be tempted to spend
- Drawbacks: Savings accounts often yield a lower interest rate than money market accounts and CDs. They don't come with a debit card for purchases (however, if your savings account is at the same financial institution as your checking account, you could use your debit card for ATM withdrawals from your savings account if your bank permits it). Moreover, banks have traditionally limited consumers to no more than six withdrawals per month from these accounts.
Although the withdrawal restriction was lifted in April 2020, it's still in effect at some banks, so check with your bank for the latest rules.
Savings Account Tips
- If local banks or credit unions are too expensive, look at online-only options. Online savings accounts often pay the most interest and charge the lowest fees.
- To build up your savings account, drop a lump sum of cash into an account to start with or set up automatic monthly deposits into savings.
Checking accounts are used for everyday spending. The key features of this type of bank account are a linked debit card you can use for purchases or ATM withdrawals, as well as check-writing abilities. The account type also allows you to deposit cash or checks and pay bills. Most banks now offer online bill-pay services through checking accounts, streamlining payments.
While traditional checking accounts don't earn interest, interest-bearing checking accounts provide an opportunity to get extra interest on top of what you get from a savings account.
This basic type of bank account is the best place to keep cash for short-term use and is essential to managing your monthly cash flow.
- Good for: Anyone who needs a place to deposit a paycheck or cash or make payments, those who keep a relatively small balance, and people who enjoy the convenience of a debit card.
- Drawbacks: Traditional checking accounts don't offer interest and are subject to a variety of fees and restrictions, including monthly maintenance fees and minimum balance requirements, which can become expensive and cumbersome quickly. But there are checking accounts with waivable monthly fees, along with free checking accounts without maintenance fees.
- Balance your checking account every month. This process of evaluating cash inflows and outflows from the account helps you manage your money, avoid fees, and spot fraud or errors before they cause major problems.
- Set up direct deposit of your wages into your checking account. If your employer doesn't offer direct deposit, use mobile deposit if your bank offers it so that you don't have to visit a bank branch or ATM to deposit a check.
- For day-to-day spending, it may be safer to use a credit card instead of a debit card because money is physically taken out of your checking account with a debit card purchase but not a credit card charge. And if your credit card gets hit with a fraudulent charge, your maximum liability for those charges is less than it is for unauthorized debit card charges.
Act quickly if you observe a fraudulent debit card charge. If you report debit card fraud to your bank within two days from when you notice it, your liability for the charges tops out at $50. After 60 days, your maximum loss is the full amount that was taken from your account.
Money Market Accounts
A money market account combines features of both savings and checking accounts. They offer limited check-writing privileges and collect interest at higher rates than savings or checking accounts, making them useful for short- or long-term needs.
If you tend to carry higher balances in checking accounts and want the ability to earn more interest and write checks, these bank accounts can be a great option to park cash.
- Good for: People who hold high balances in their account and want to earn higher interest rates.
- Drawbacks: Money market accounts have higher minimum balance requirements than other types of bank accounts. Interest rates are sometimes low, and you need to watch for fees. The number of withdrawals permitted monthly has traditionally been capped at six as with savings accounts.
Money Market Account Tips
- Use money market accounts as emergency funds or a place to park money for larger financial goals (a down payment on a home, for example). Don’t access the money for other purposes to ensure that it’s there when you need it.
- If you can’t find an affordable money market account, look at online-only banks and cash management accounts, which are typically low-cost options.
Certificates of Deposit (CDs)
A CD is like a savings account that holds your money for a fixed term—three months or five years, for example. It usually allows you to earn more than any of the accounts listed above, but you'll have to commit to keeping your money in the CD for the full term (ending on the "maturity date") to avoid an early withdrawal penalty.
This type of bank account is best for saving for financial goals with a planned end date. For example, if you know you're going to take a trip abroad within six months, a CD would be a good place to keep (and grow) your money until you need it.
- Good for: Money that you don't need to spend right away. You'll earn more by locking it up for a while, but both short- and long-term CDs are available.
- Drawbacks: If you decide to pull your funds out early, you'll have to pay a penalty. That penalty might wipe out everything you earned, and even eat away at your initial deposit.
- If you’re concerned about locking up all of your money, set up a CD ladder (multiple CDs with staggered maturity dates) to make a portion of your savings available periodically.
- To avoid penalties altogether, look for banks that offer flexible CDs that give you the option to withdraw money early—without a penalty.
Your deposits in all of the above accounts are federally insured for up to $250,000 per bank, per depositor, either through Federal Deposit Insurance Corporation (FDIC) insurance for banks or National Credit Union Share Insurance Fund (NCUSIF) insurance for credit unions.
As the name suggests, these are accounts you use to set aside money for spending in retirement. Most banks offer Individual Retirement Arrangements (IRAs), but some also provide 401(k) accounts and other retirement accounts for small businesses.
Most types of retirement accounts offer tax advantages. Both IRAs and 401(k) plans let you avoid paying income tax on the growth of your contributions each year, but you'll have to pay taxes at different points depending on the account type. Traditional IRA and 401(k) contributions reduce your taxes now, but you'll have to pay taxes on withdrawals later. Contributions to a Roth IRA don't reduce your taxes now, but the upside is that you won't pay taxes on withdrawals later.
These are the best types of bank accounts for saving for retirement because they allow you to invest your money in the stock market, which creates the potential for greater returns than you could get on deposits in other types of bank accounts.
- Good for: People who want to save for their future. Retirement accounts can make it easier (by easing your tax burden) to save money, and they might result in larger account balances over the long term.
- Drawbacks: Any tax benefit you get comes with strings attached. Read up on your account agreement and ask your banker about the rules (including rules for eligibility). Speak with your tax preparer or a CPA to verify how your taxes may be affected by various options. If you withdraw funds early, you may have to pay taxes and steep penalties. Finally, when you put money into the market, there is always a risk that you will lose it. And investments in retirement accounts aren't federally insured.
Retirement Account Tips
- Speak to a financial advisor to get help with planning how much to save and what account types and investments to choose to maximize gains and minimize losses.
- If your company offers a 401(k) match, consider contributing enough to get the match before you start putting money into a retirement account with your bank. Otherwise, you're leaving free money on the table.
Note: Justin Pritchard updated portions of this article.
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