Types of Bank Accounts Explained: Features, Benefits, and Uses
There are quite a few types of bank accounts that you, as a consumer, can open. From standard checking and savings accounts to IRAs and HSAs, the bank can keep your money secure, often giving you a bit of money back in exchange. Each account is created for a different reason, and utilized with a different goal in mind. Some simply hold your money, while others can help you earn money for retirement.
Table of Contents
- 1 Interest Bearing vs Non-Interest Bearing
- 2 Checking Accounts
- 3 Savings Accounts
- 4 IRAs and Retirement Accounts
- 5 CDs or Certificates of Deposit
- 6 Money Market Accounts
- 7 HSA: Health Savings Accounts
Interest Bearing vs Non-Interest Bearing
First, you need to understand interest with respect to bank accounts. Unlike in a bank loan, where you are charged interest for borrowing money, the bank is borrowing money from you. They often use the money you deposit to either invest, or loan out to other customers. For allowing the bank to do this, they give you money in return in the form of interest. Not all accounts accrue interest, and the type of account often dictates how much interest the bank will pay you. Savings accounts, for example, are likely only to see a few tenths of a percent to a few percentage points of the total returned as interest.
Benefits and Features
A basic checking account is a very common account that offers checks and a debit card. You can deposit, make withdrawals, and pay bills with a checking account. It’s also typically where you deposit a paycheck or cash. When you draw money from an ATM, it’s usually from a checking account.
Checking accounts may not come with interest. If they do, the most common checking accounts have less than 1 percent interest. While there are higher-yield checking accounts that could have upwards of 5 or 6 percent, these often come with stipulations such as having a large amount of money in the account, using the debit card a minimum number of times per month, and larger fees. Choosing the right bank can also affect your interest rates.
Credit unions, being not-for-profit, might also give you a higher interest rate on checking accounts. Be sure to shop around before opening an account to ensure you get an account that suits your needs and desired interest rate.
Due to some checking accounts being free, associated fees can be high. For example overdraft fees can be high; using a credit card can alleviate this. However, basic accounts usually do not require a certain balance and have no maintenance fees.
What You Need To Open a Checking Account
There are normally few restrictions on opening basic checking accounts, though high-yield checking accounts may have restrictions, such as needing a minimum balance on opening. Otherwise, you will need a form of ID such as your driver’s license, Social Security card, or passport.
Benefits and Features
Savings accounts are for, as the name implies, saving money. This is the opposite of a checking account, which is meant for holding and spending money, rather than holding and saving. These are typically the first type of account a person opens with a bank, often as children and with the help of a parent. This might occur when you get your first job as a teenager, for example.
It’s also important to note that savings accounts do not come with a debit card. Banks may also limit the number of withdrawals from a savings account per month.
The point of a savings account is to keep money in the account. The bank then uses this money to lend out to other customers. This means it has a slightly higher interest rate than a checking account. Even so, don’t expect to make a huge amount of money off of interest, especially compared to a CD or money market account. The bank or type of savings account dictates when interest is paid. It may be monthly, annually, or after a specific term.
Fees depend on the bank. Some banks will charge you an opening fee, while others will open a savings account for free. If you fall below a minimum balance in the account, you will likely be charged monthly fees and an annual fee until you are above the required balance.
The Federal Reserve also limits withdrawals from savings accounts. “Regulation D,” officially 12 C.F.R.204.2(d)(2), limits savings accounts to a total of six withdrawals per statement period via “convenient” methods such as checks, debit card payments, or automatic payments such as electronic bill payment. There is no limit to withdrawals made in person, via ATM, by mail, or by telephone request for a mailed check. However, individual banks may have a stricter limit and impose fees after their internal limit. Should you repeatedly exceed this limit, the account may be closed or converted to a standard checking account.
What You Need To Open a Savings Account
Typically, you only need a minimum balance to open a savings account, along with ID such as a driver’s license, Social Security card, or passport.
IRAs and Retirement Accounts
Benefits and Features
Individual retirement accounts, better known as IRAs, and other retirement accounts are long-term accounts meant to generate money via compound interest. Unlike CDs, there are tax advantages to IRAs and retirement accounts, where you can avoid paying income tax on interest. How and when you pay tax depends on the account, such as a Roth IRA vs. a traditional IRA. However, in any case, these accounts are meant to keep money long-term, with interest made fed back into the accounts to make more money — hence compounding interest.
For more information on CDs, read on to the CD section.
Depending on the accounter, there may be no actual interest rates. Instead, you make investments through the bank or other financial institution. Through a bank, you may find retirement accounts options limited to a type of savings account or a CD. On bank IRAs, you will likely find interest rates similar to savings accounts, as many technically are savings accounts.
Generally, the major fees associated with bank IRAs are early withdrawal fees. For retirement accounts with an outside firm, you will typically find transaction fees. You can also choose a “robo-advisor” at some firms, which will manage the account for you for a fee. This fee can be lower than a human advisor, though obviously lacks a human brain and can be less dependable than an actual person to talk to. There may be a startup fee or maintenance fee, especially if you fall below a minimum balance.
What You Need To Open a Retirement Account
If you are opening an account through a bank, you just need the money to start the account and ID. For an outside firm, you may need to have an idea of what investments you want to make, but you can also talk to an advisor or go with suggested investments.
CDs or Certificates of Deposit
Benefits and Features
CD accounts tend to be high yield in terms of interest, especially compared to checking and savings accounts, but there’s a significant catch: your money is locked away for a set period of time. The longer you commit your funds, the higher the interest rate. A 6-month CD has a lower interest rate than an 18-month CD, which has a lower interest rate than a 5-year CD, for example. A ladder CD will let you withdraw in increments, but you will probably not make as much money off of interest.
Because your money is typically locked away, you will make much more interest than a checking or savings account. Lower-end lengths might see about 1 percent interest rates, while multi-year CDs can see upwards of 3 percent or more.
The major fee associated with a CD is early withdrawal. The penalty will be hefty, with the fee potentially negating any gains you have made through interest and might even dig into your initial deposit. It is not advised that you draw money from a CD unless you have a major emergency.
What You Need To Open a CD Account
You will need ID to open the CD, and money that you will not miss for the length of the CD term.
Money Market Accounts
Benefits and Features
A money market account combines features of checking and savings accounts, and usually has higher interest than either. The drawback is that they have minimum balance requirements, often between $5,000 and $10,000. While you are given checks and a debit card, like savings accounts, you are only able to “conveniently” withdraw from a money market account up to six times per month.
An important note: A money market account is not a money market fund. A money market fund is an investment, and depends on the market, meaning it could lose money. Money market accounts, however, only accrue interest, and are backed by the FDIC or NCUA, depending on whether they are through a bank or credit union, for up to $250,000.
The draw of money market accounts is their higher interest rates than checking or savings accounts. However, depending on the financial climate some money market accounts make about the same as some savings accounts; be sure to check with your bank before opening an account.
Fees are generally for making more than six withdrawals per month, or falling below a minimum balance. The latter will incur a monthly maintenance fee until the minimum balance is met, or with falling interest rates.
What You Need To Open a Money Market Account
You will need ID and a minimum deposit. Some banks will allow you to open an account with less than the minimum balance, but will charge a fee until the balance is met, or with a smaller interest rate. However, oftentimes the interest rate is still better than the national average, even without meeting the minimum balance.
HSA: Health Savings Accounts
Benefits and Features
A health savings account is almost a mix of different types of accounts. While it functions like a checking account in that you can withdraw from it, you generally only withdraw to pay for medical expenses as a supplement to insurance. Like an IRA or retirement account, it grows through investments instead of through pure interest, and there are tax benefits. Contributions are pre-tax, and won’t be taxed if they are withdrawn to pay for qualified medical services. Like a savings account, the goal is to save the money.
Much like IRAs and retirement accounts, HSAs are actually investments. They do not grow through interest, but through investing and earning money off the market. This means, unlike many of the accounts on this list, that they can lose money. However, many companies that offer HSAs as part of their benefits will also match money per month that you add to the account, up to a percentage or dollar limit, making it worth your while to put part of every paycheck in the account. There are contribution limits per year.
If you pay for something that is not a qualified medical service, you will have to pay a penalty fee.
What You Need To Open an HSA
Generally, HSAs are part of High Deductible Health Plans. These are often provided through your employer or local insurance exchange. You may be given the option of which bank you want to open the HSA with, or in some cases, the provider will choose.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42
This post was updated January 28, 2019. It was originally published January 31, 2019.