Types of Savings Accounts: Where Is the Best Place To Put Your Savings?
Savings accounts provide a way to earn interest, often in a government-insured package. Numerous types of savings accounts are available, and while they all share certain characteristics, they also have different structures and financial goals.
What Are the Three Types of Savings Accounts?
There are several types of savings accounts, but you can think of them in terms of three very broad categories.
- The first type is a deposit account, which is what most people think of as a standard savings account. Deposit accounts can carry FDIC insurance. Savings accounts generally pay more interest than checking accounts, and you can access the money at any time.
- The second type of account is a money market savings account. This type of account also carries FDIC insurance and may allow check-writing in addition to paying interest.
- The third type of account is a CD account. These types of accounts typically pay higher interest than savings deposit accounts or money market accounts but assess penalties for withdrawals before maturity. CDs also carry FDIC insurance.
Here’s a closer look at some of the most common types of savings accounts.
Savings Deposit Accounts
Traditional savings accounts carry insurance from the Federal Deposit Insurance Corp. of up to $250,000 per depositor, per bank. This is one of the major distinctions between deposit accounts like checking, savings, money market and certificate of deposit accounts, and investment accounts such as brokerage accounts.
- Benefits: Traditionally pay interest and carry FDIC insurance.
- Drawbacks: Interest may be low, and certain withdrawals are limited to six per month.
- Who they are best for: Customers looking for their first savings account or those who need to open other accounts at certain institutions such as credit unions.
Jumbo Savings Accounts
A jumbo savings account is structurally the same as a regular savings deposit account. However, jumbo accounts have a minimum opening deposit of $100,000 or more. In exchange for this larger minimum deposit, these types of accounts sometimes pay a higher rate of interest.
- Benefits: Can pay higher interest than regular savings accounts.
- Drawbacks: Require a minimum deposit of at least $100,000.
- Who they are best for: Customers with at least $100,000 in savings seeking higher interest.
High-Yield Savings Accounts
As the name implies, high-yield savings accounts are designed to pay a higher interest rate than a regular savings account. These types of accounts have sprung up rapidly with the advent of internet banking. Online-only banks have lower overhead costs, so they often pay higher yields on their savings accounts.
- Benefits: Usually have the highest available annual percentage yields for savings accounts.
- Drawbacks: Many banks with top-tier savings yields don’t have physical locations.
- Who they are best for: Customers seeking the top yields while still protecting principal.
Rewards Savings Accounts
Rewards savings accounts offer additional benefits based on goals that account holders reach, such as hitting a certain balance level or opening a complementary account.
- Benefits: Can earn rewards in addition to interest.
- Drawbacks: Yields can be lower than other savings accounts in exchange for the rewards bonuses.
- Who they are best for: Customers looking for additional benefits beyond earning interest on their savings.
Money Market Accounts
Money market accounts are somewhat akin to enhanced savings accounts. Like savings accounts, they carry FDIC insurance, and certain withdrawals are limited to six per month. One of the main differences between a money market account and a straight savings account is that you can often write checks against a money market account.
- Benefits: Can write checks against the account in addition to earning interest and enjoying FDIC insurance.
- Drawbacks: Some withdrawals are limited to six per month, and many money markets have higher minimum balance requirements to open accounts and/or avoid fees.
- Who they are best for: Customers looking for higher yields than traditional savings or checking accounts, or those looking for check writing access to their savings account.
Joint Savings Accounts
Joint savings accounts are simply savings accounts with two owners. Each owner is legally entitled to manage the affairs of the account. This makes joint accounts very convenient for couples.
- Benefits: Either owner can usually conduct transactions without the other present.
- Drawbacks: One owner could theoretically drain the account without the other’s permission.
- Who they are best for: Customers combining funds with a partner, spouse or other trusted individual.
Student Savings Accounts
A student savings account is a beginning savings account designed to let students manage their own money and get access to financial products. A student savings account often provides perks such as no fees.
- Benefits: Young account holders can learn more about money and finances, and often with no monthly fees.
- Drawbacks: May have limited services compared with other bank accounts.
- Who they are best for: Students looking to get their first banking accounts.
Certificates of Deposit
CDs are time deposits that pay you a set interest rate over a given time period. CDs often have maturities between three months and 10 years, with longer terms often paying higher rates. CDs carry the same FDIC insurance as many savings accounts but usually have penalties if you take money out before they mature.
- Benefits: FDIC insurance and fixed interest rates, often higher than those paid by traditional savings accounts.
- Drawbacks: Penalties for early withdrawal.
- Who they are best for: Customers seeking fixed yields and government insurance.
College Savings Accounts — 529 Plans
College savings accounts act like IRA plans for college savings. Contributions and earnings grow tax-free when distributions are used for qualifying educational purposes like tuition, fees, room and board.
- Benefits: Tax-advantaged way to save for educational expenses.
- Drawbacks: Might have high fees, limited investment options or withdrawal penalties for noneducational purposes.
- Who they are best for: Customers seeking a tax-advantaged way to save for educational expenses.
Individual Retirement Accounts
An IRA lets you save for your retirement while enjoying tax benefits along the way. There are two types of IRAs: traditional and Roth. Qualifying contributions for traditional IRAs go into the account before they are taxed, grow tax-deferred until retirement and include tax-deductible contributions.
- Benefits: Tax-advantaged savings vehicle for retirement; potential tax deduction for contributions.
- Drawbacks: Withdrawals of both contributions and earnings are taxable; most distributions before age 59 1/2 are hit with a 10% penalty.
- Who they are best for: Investors looking for a tax deduction on their contributions to long-term savings.
A Roth IRA is a special type of IRA in which contributions are made on an after-tax basis but from which qualified retirement contributions can be taken tax-free.
- Benefits: No taxation of withdrawals after age 59 1/2; no taxation at any time for withdrawal of contributions.
- Drawbacks: No tax deduction for contributions.
- Who they are best for: Investors anticipating a higher tax rate after retirement, or those who don’t need a current tax write-off on their tax-advantaged savings contributions.
401(k) Retirement Plans
A 401(k) plan offers similar tax advantages to a traditional IRA, except 401(k) plans are sponsored by employers rather than individuals. They also carry higher contribution limits.
- Benefits: Tax-advantaged accounts for retirement savings; possible employer match.
- Drawbacks: Withdrawals are limited until retirement; 10% penalty for most distributions before age 59 1/2.
- Who they are best for: Workers looking for tax-advantaged long-term savings and employer contributions to their retirement accounts.
Health Savings Accounts
An HSA is like an IRA account for medical expenses. Contributions are tax-deductible and withdrawals can be tax-free when used for qualifying medical costs. You’ll need to have a high-deductible health insurance plan to qualify for an HSA.
- Benefits: Tax-advantaged way to save for healthcare expenses.
- Drawbacks: 20% penalty, in addition to taxation, on withdrawals for nonhealthcare expenses; requires high-deductible health plan to open.
- Who they are best for: Investors with high-deductible health plans seeking a tax-advantaged way to save for medical expenses or retirement.
Which Type of Savings Account Is Best?
The best type of savings account for you is the one that meets your financial needs. For some customers, that means the highest APY available. For others, a completely fee-free account fits the bill. Some customers might value international ATM access or fee rebates. The bottom line is that no one account can do everything, so you should research the features and benefits of the different types of savings accounts you are considering to determine which is the best fit.
Information is accurate as of Dec. 9, 2022.