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Types Of Savings Accounts

Types Of Savings Accounts
Roger Wohlner
Updated October 21, 2021
8 Min Read

Savings accounts can be a good place to keep money that you will need in the near future and want to keep in a safe account. It can also be a good spot for your emergency fund or for saving for a goal like a downpayment on a house. 

There are a number of varieties that fall under the savings account umbrella. These accounts all have their pros and cons. The best type of savings account for you will depend upon your situation. What are you saving for? What is the time horizon until you will need the money? These and other factors should go into your decision when choosing the best savings account for your needs. Here is a look at some of the types of savings accounts you can choose from. 

Regular or traditional savings accounts

A traditional savings account is what often comes to mind when we hear the term savings account. These types of savings accounts are generally offered by commercial banks and credit unions. 

Regular savings accounts offer you the opportunity to earn interest on money deposited in the account. The interest rate will generally be lower than most other types of savings accounts. You will have access to the money, but some institutions may restrict the number of withdrawals you can make each month. The rules around Regulation D that restricted the number of monthly withdrawals have been relaxed in recent years, but some banks and credit unions may still restrict the number of monthly withdrawals and charge a fee if you exceed this number. 

Most traditional savings accounts at commercial banks will carry Federal Deposit Insurance Corporation (FDIC) insurance for amounts up to $250,000. Accounts via credit unions generally have a similar type of insurance through the National Credit Union Administration (NCUA). You will want to check on the type of insurance carried by the institution where you are considering opening an account. 

Money market accounts

Money market savings accounts tend to pay a little higher interest than a regular savings account. They will typically require a higher minimum deposit, often around $1,000, to avoid monthly fees. 

Money market accounts generally combine the interest bearing component of a regular savings account with the ability to write checks from your account. Some money market accounts offer a debit card feature as well. 

Banks and credit unions may impose a maximum number of withdrawals during the money, and you could incur a penalty for exceeding this number of withdrawals. 

Money market savings accounts offer the same federal insurance as regular savings accounts either through the FDIC or the NCUA. It's always best to check with the financial institution to verify the insurance before opening your account. 

Money market savings accounts differ from money market mutual funds. Money market funds are typically opened through a brokerage or mutual fund company. These accounts are not federally insured and are considered to be investment accounts versus savings accounts. 

High-yield savings accounts

High-yield savings accounts offer a higher rate of interest than a regular savings account. Online banks often offer these types of accounts as a means to attract more deposits. This can be a good route to go if you are comfortable with doing your banking online via your computer or an app. 

High-yield savings accounts generally offer the same type of deposit insurance as a regular savings account, but you will want to check with the bank or financial institution prior to opening your account to be sure. 

If opened via an online bank, you will often find that any monthly maintenance or excess withdrawal fees on these accounts are lower than the fees on savings accounts at brick and mortar banks. This is due to the lower overhead that online banks have which is also a reason that high-yield savings accounts are most often available via online financial institutions. 

Certificates of deposit (CDs)

Certificate of deposits or CDs are time deposits. This means that you have to leave the money in the account for a specified period of time. The money in the account earns interest over this time period. When the CD matures, you have the option of withdrawing the money or rolling it over to a new CD. 

CDs are federally insured accounts and are available through banks, credit unions, online savings institutions and through some brokerage firms. Brokered CDs are originated by banks but are offered by the brokerage firm as a wider form of distribution. As with other types of savings accounts, the CD rates offered by online banks will often be higher than their brick and mortar counterparts. 

If you are considering a CD it's wise to be certain that you won’t need the money prior to the end of the CD’s term. The penalties for cashing out early can be steep, sometimes including some of the interest earned. 

CDs can be a good option for a savings goal where you are certain of the time frame for needing the money. 

CD ladders can provide a means of saving in a low risk account and having a CD mature at regular intervals. You might have a CD mature every three or six months over a period of time. When the CD matures you can decide if it makes sense to reinvest in another CD at the longer end of this ladder or do something else with the money. 

Cash management accounts

Cash management accounts or CMAs often have higher interest rates on the order of high-yield savings accounts. CMAs are generally offered by nonbank entities such as brokerage firms or robo advisors. CMAs aren’t savings accounts per say, but rather they are cash accounts for money that is waiting to be invested at some point. 

Some brokers may have a banking arm or a connection with a bank and can offer FDIC protection on their CMAs. Having a CMA linked to a brokerage account or one with a robo advisor allows you to transfer funds into an investment vehicle like a mutual fund with little or no delay. 

Specialty savings accounts

Beyond the savings accounts mentioned above, there are numerous types of specialty savings accounts that are generally used for a specific purpose. Specialty savings accounts may be regular savings accounts that are structured to serve specialized purposes via the ownership structure of the account. These specialty accounts can include: 

Kids savings accounts

These might be accounts specially designed to allow kids to add money they’ve earned from doing chores around the house, babysitting or from gifts received from parents or others. In most cases the parents will have access to this account and be able to control it if needed. 

There are a number of apps that allow children to deposit money and spend it via a special debit card as well. These apps are built around teaching kids financial responsibility and showing them how their savings can compound if managed correctly. 

Custodial savings accounts

A custodial savings account is an account that an adult controls for a minor. In most states these accounts are usually in place until the minor reaches the age of majority, usually 21. The account can be closed earlier than that and transferred to another account for the minor if desired. The savings account can be a regular saving account or one of the other types described above.

Student savings account

Some banks offer savings accounts geared towards students. They may offer incentives such as free travel cards, discounts on certain purchases and no interest on overdrafts. These accounts are not available to customers other than students. To open an account the student will have to provide proof they are enrolled at a college or university. These are often offered in college towns or by banks in close proximity to a local college or university.

These accounts can help students manage their money, some banks may offer access to budgeting apps and other tools for the students to use. 

Christmas club savings accounts

Christmas club accounts are savings accounts offered by some banks to help people save for holiday gifts and related spending throughout the year. In the case of some Christmas club accounts, you might be penalized if you withdraw the money prior to a certain date. These penalties could include the loss of any interest earned up to that point. 

If you are looking to save for anticipated holiday spending, you can certainly use any type of savings account. The idea of a Christmas club originated in the early 1900s and these accounts were popular in the 1960s and 1970s. They are much less prevalent today. 

Home down payment savings account

Some states offer a first time home buyer savings account geared towards helping first time buyers saving up for a down payment on their first home. These accounts are tax-advantaged, although the exact nature of the tax benefits vary. In some states there are no taxes on the interest earned in the account. In other cases deposits can be made on a pre-tax basis. 

Currently seven states offer some version of this type of account and nine additional states are considering adding these accounts as well. It’s important to understand all restrictions on the use of the money in the account as there may be penalties if the money is used for a purpose other than as a down payment on a first home. 

Health savings accounts (HSA)

Health savings accounts are only available in conjunction with a high-deductible health insurance plan as defined by the IRS. Annual contributions to the HSA are made on a pre-tax basis. If the money is withdrawn for qualified medical expenses, the withdrawal is tax-free. 

If the money is not needed for current year medical expenses, the money can be carried over up to and into retirement to cover qualified medical expenses in retirement. If desired, the funds can be withdrawn at age 65 or later in the same fashion as an IRA account. The withdrawal will then be taxed, but there will be no penalties. 

HSAs can be held in an interest-bearing account or in many cases invested much like an IRA using mutual funds and other types of investment vehicles. The amount that can be contributed to an HSA is set by the IRS and may be increased over time. 

529 college savings accounts

A 529 college savings account is generally offered by brokers, mutual fund companies and other types of institutions. They are usually affiliated with a specific state. 

Money is contributed on behalf of a minor and this money then accrues until needed for college expenses. The money can also be used for trade schools and other types of specialty education as well as for graduate and professional schools. 

The account generally has an owner and contingent owner, often the parents of the account beneficiary. Investment options may include savings accounts, mutual funds and other types of investments. The money must be used for eligible expenses such as tuition, books, room and board and other expenses. If the money is used for non-eligible expenses there will be a penalty and the money could be subject to taxes. If the funds are used properly for eligible expenses they will not be taxed. 

If not fully used by the beneficiary, the money can be used by siblings or other family members. Recent legislation also opened up the use of 529 money to repay student loans. 

Traditional and Roth IRAs

Money in a traditional or Roth IRA can be invested in a regular savings account or any one of the other types of non-specialty accounts listed above. The interest on the account and any taxation will be in accordance with the rules for a traditional or Roth IRA

There are a variety of savings accounts that can be used for a variety of purposes. Before opening an account and depositing money, be sure that you fully understand all of the rules surrounding the account, any deposit minimums, the interest rate, any deposit insurance associated with the account and all other terms and restrictions on the account. This will help you choose the best type of savings account for your needs and avoid unwanted hassles down the road.

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