A transaction deposit is a deposit made in a transaction account that can be withdrawn without delay or penalty. Banks that offer transaction deposit accounts are subject to higher reserve requirements set by the Federal Reserve than non-transaction deposit accounts.
Definition and Examples of Transaction Deposits
Transaction deposits are liquid, meaning they can be cashed at any time. A checking account is an example of a transaction account from which transaction deposits can be withdrawn or made.
- Alternate name: Demand deposit
Transaction deposits can be accessed on demand by several means, including by making a cash withdrawal at an ATM or by cashing a check at a bank branch.
Conversely, non-transaction deposits are known as time deposits. Accounts that limit monthly transfers or set waiting periods for accessing funds are non-transaction deposit accounts, like savings accounts. Certificate of deposit (CDs) or individual retirement accounts (IRAs) are examples of non-transaction accounts. Withdrawals are subject to maturation periods and can result in penalty fees.
How Transaction Deposits Work
Under Regulation D, banks must keep a positive reserve for transaction accounts. Transaction account holders are granted unlimited transfers and payments to third parties as well as internally between accounts. Accounts are able to earn interest but do not always. In contrast, banks offering non-transaction accounts, like savings accounts, have a 0% reserve requirement. Savings account holders are only permitted six transfers or withdrawals per month.
Transaction deposit funds are available on demand or within seven days if the bank requires notice, though most do not.
To make a transaction deposit, you’ll deposit funds into a transaction deposit account like a checking account. When you want to withdraw funds, you have several options including using a check or linked debit card, ATM, making an internal transfer to another account, or a withdrawal slip at your local branch.
Transaction deposit accounts, like non-transaction deposit accounts, are insured up to $250,000 per account, per depositor under the FDIC.
The 2010 Dodd-Frank Act offered temporary unlimited insurance coverage to non-interest-bearing transaction accounts. The act provided unlimited coverage for two years for all of these types of accounts regardless of the amount in them.
Types of Transaction Deposits
Several types of accounts and financial products qualify as transaction deposits, including direct deposit and paychecks, cashier’s checks, cash, and transfers between transaction deposit accounts. It includes demand deposit and Negotiable Order of Withdrawal (NOW) accounts, which are demand deposit accounts that earn interest.
A good rule of thumb to determine whether an account is a transaction deposit account is if it:
- Offers unlimited withdrawals and transfers
- Does not set a maturity date on deposits
- Can be cashed on demand or within seven days, depending on the bank
- Has no eligibility requirements
Checking accounts are usually transaction deposit accounts, and in some cases, savings accounts can be classified as transaction deposit accounts as well. Savings deposits are usually considered non-transaction deposit accounts because they generally limit activity to six transfers or withdrawals per month.
However, the Federal Reserve can deem a savings account a transaction deposit account if the bank allows multiple savings accounts to be opened for the sole purpose of making additional transfers. According to Regulation D, there must not be any other reason for opening multiple savings accounts in order to qualify the accounts as transaction accounts.
In this case, the bank would need to “suggest or otherwise promote the arrangement” in order for the accounts to be deemed transaction deposit accounts, meaning if the account holder opens several accounts to allow for additional transfers without consulting the bank about this purpose, the accounts are savings deposits under the law. The same exception applies to linked time deposit accounts.
- Transaction deposits can be cashed out without restriction or a waiting period. Rarely, a bank may ask for up to seven days' notice for withdrawal.
- Banks that offer transaction deposit accounts are subject to a positive reserve requirement.
- Options to withdraw funds from transaction deposit accounts include transfers, paper checks, and debit card payments.