Why Everyone Should Have These 5 Types of Savings Accounts
You might have heard of different types of savings accounts before, but how do you know which accounts are the best fit for your savings needs?
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Your overall financial picture may require using one or more savings accounts to reach your financial goals. Let’s review some of the most common savings accounts and the types of savers these accounts make for an ideal match. Read on to see why everyone should have these savings accounts.
- Ideal for: Someone who is beginning to grow their savings or wants to immediately access their money
Those who open a savings account may use it for short- or long-term savings. This money should always be available to you without withdrawal fees.
Jaspreet Chawla, SVP of savings products at Navy Federal Credit Union, said savings accounts pay interest on the money you deposit in the account. However, this interest typically isn’t significant. While the interest is smaller than other savings account options, Chawla said your money will always be accessible to you.
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Money Market Savings Account
- Ideal for: Those saving to reach a financial goal, such as building an emergency fund or making a large purchase
A money market savings account is a type of deposit savings account. It accumulates dividends based on the account balance. Compared to most savings accounts, a money market account pays interest on your deposits at a higher rate. This can help grow your funds, which can be easily accessed through ATM withdrawals, transfers and writing checks.
Keep in mind, however, there are certain requirements necessary for opening a money market savings account. Chawla said these accounts often have minimum balance requirements. The higher your balance, the greater your earnings will be.
High-Yield Savings Account
- Ideal for: Short-term savings goals, like buying a car or taking a vacation, or storing an emergency fund
Ben McLaughlin, president at SaveBetter, said high-yield savings accounts are similar to traditional savings accounts but offer better interest rates. If you need to quickly access funds on short notice, you’ll often be able to do so with a high-yield savings account.
“Savers should note savings account rates are variable, meaning they may change at any time based on overall market conditions. The good news is banks are expected to continue offering even more attractive interest rates on average, as the Fed is widely anticipated to continue to increase rates,” McLaughlin said.
- Ideal for: Those saving money over time with a guaranteed return or those working to reach savings goals with a specific end date, like a wedding or having a child
What is a savings certificate? Certificates allow you to plan out your savings by providing guaranteed returns. You can access these returns on a set maturity date.
“Basically, you add money to your certificate and watch it earn a higher interest rate than with savings accounts,” Chawla said. “Be careful when it comes to choosing a certificate that is right for you if you typically need immediate access to cash, because you can’t withdraw the money whenever you want. Usually, you must wait until a certificate’s maturity date to avoid an early withdrawal penalty.”
Individual Retirement Account (IRA)
- Ideal for: Anyone who wants a long-term savings option for retirement
If you’re ready to start saving for retirement, you may open an IRA or a Roth IRA. An IRA is a potentially tax-deferred retirement plan. Until you withdraw the funds, you may not pay taxes on your contributions.
Under the new SECURE Act, Chawla said you can continue to make annual contributions, which may be tax-deductible, as long as you have earned income. You will continue to earn tax-deferred growth until you elect to withdraw funds from your account. IRA account holders may begin making withdrawals once they reach the age of 59 1/2 or older.
What about a Roth IRA? A Roth IRA is taxed as ordinary income. Withdrawals are tax-free, but Chawal said you must meet certain requirements including holding the account for five years (minimum) and being at least age 59 1/2 when you start distributions.
How much can you contribute to an IRA? Chawla said the annual contribution limit for 2023 for a traditional IRA is $6,500 for individuals under age 50 ($7,500 for individuals age 50 and older) or your earned income, whichever is less.
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