- 1 Savings Account Types
- 1.1 Regular Savings Accounts
- 1.2 Joint Savings Accounts.
- 1.3 Money Market Accounts (MMA)
- 1.4 Certificates of Deposit (CDs) Accounts
- 1.5 Other Special Savings Account Types
- 2 Important Tips when Choosing a Savings Account Type
- 3 Final Verdict
Savings Account Types
It is always a good time to invest and save. The savings account type that you choose can make a big difference in achieving your financial goals. Deciding which type of accounts to open can be confusing. But does it have to be? In this article, we will outline several types of savings accounts. We will highlight their key features to aid you in that decision. So here goes.
Regular Savings Accounts
A regular savings account is what is likely to come to mind on the thought of a savings account. You can easily open this type of account with a local bank or credit union. With this account, you can simply put money in and take money out. This is as simple as it can get.
To keep the account active, banks normally require a minimum balance to be maintained. A limit is also placed on the number of withdrawal transactions per month. The good thing about a savings account is that interest is paid on your deposit.
Regular savings accounts can also have variations based on other factors such as the amount of the deposit, interest rates, number of account holders, and additional account benefits. The key thing is for you to get the highest interest rate and lowest fees possible. Such accounts include:
Jumbo savings accounts
These accounts generally require higher deposits, typically over $100,000. They also attract a higher interest rate than regular savings accounts. Different banks offer a wide range of interest rates and so it is important to find the best rates and terms before opening an account.
These accounts pay a higher interest rate than a regular account. Due to the higher interest rates, the increase in earnings is significant. In the current economic environment, regular savings accounts offer very low-interest rates. Due to this, many banks offer high-interest accounts to attract more deposits.
Rewards savings accounts
This account earns rewards for saving more money. Incentives may include cash bonuses, higher interest rates for increased deposits, ATM fee rebates, and fee waivers. On the downside, these accounts can expect more from you. You may face restrictions such as a higher deposit requirement, a lower interest rate, or limitation on the number of withdrawal transactions.
Are the incentives worth it? Generally yes. But note that a certain account should be tailored to your needs and have a good rate of return.
Online savings accounts
This is a savings account that operates fully online. All interactions with your account are done via mobile app or your browser and you have the freedom to manage your account as you like without the hassle of stopping your schedules waiting for the bank to open. These accounts combine versatility with higher interest and earnings potential. Whether you are looking to open a new savings account or want to upgrade to a better savings account, you should consider an online savings account. Here are the reasons why.
- Higher interest rates
- Better technology
- Fewer charges
- A simplified money transfer process
Joint Savings Accounts.
This is a savings account opened by two or more people. This type of account can help you to potentially streamline your financial planning with another person. You should, however, open it after establishing clear rules with the people you intend to hold the account.
The account can provide better financial protection since the Federal Deposit Insurance Corporation (FDIC) normally insures a higher amount for a joint savings account.
Money Market Accounts (MMA)
Savings and money market accounts are similar since they are both deposit accounts and they pay interest. However, money market accounts offer some additional benefits as well as downsides.
Money market accounts in many cases pay a higher interest rate than a savings account since they are investments in short-term, liquid low-risk assets. The higher interest rate is however not always guaranteed. Although they are safe as cash, money market accounts have a low risk. It is prudent to use money market funds alongside other types of savings accounts to maximize the return while mitigating the risk.
Certificates of Deposit (CDs) Accounts
Certificates of Deposits often called CDs require savings to be locked for a defined duration. During that period, you cannot withdraw the money. However, there is a provision to incur a penalty if you choose to withdraw earlier.
After the expiry of the deposit period, the interest is realized and you can either withdraw the amount or part of it. You may also opt to have the amount rolled-forward for another similar period. In that case, you earn compounded interest on the re-invested amount. You should consider this option if you have long term savings and investment plans (3).
Other Special Savings Account Types
If you have special saving requirements, there are special account options that are specially tailored for that. These special include education, financial planning, retirement, and health. Here are such accounts.
Student savings account
These are accounts set up specifically for students for deposits and savings. There are more variations of student savings accounts tailored for different ages. Although these accounts are meant for students, they are not necessarily the best alternative for students at times.
To ensure that the students account is the best deal for you, ensure that the average interest rate offered is competitive and that the account offers unlimited withdrawal transactions.
Generally, a student account has many benefits. First, the student learns to save money, secondly, the parents save for future education expenses while they can afford, and, thirdly, the account earns interest.
Have you ever thought of saving money for a particular goal? The goal could be to buy a car or go on vacation. Setting a savings goal can help you improve your finances. Well, the idea behind goal-oriented savings is that it is specific, achievable, and measurable which keeps you sober and focused.
Long-term saving is more important now more than before due to increased human lifespan, an increase in healthcare costs, and the great earnings accrued from long-term compounding (4).
While it is easy to plan and set aside the money on paper, it is good to know that there are special savings accounts you can use for this. These are goal-oriented savings accounts, which are created to foster such savings.
These accounts can be funded with a required monthly recurring contribution or made by one-time or occasional deposits (5). They offer attractive interest rates and low fees that make it worth the while. Another benefit is that once you achieve your goal, you can change the use of the account to save for another goal.
Individual Retirement Arrangements (IRAs) Accounts
These are saving and investment tools that enable individuals to set aside funds for retirement. IRAs can take different forms depending on your employment status. These include the traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, 457(b) and 403(b). Let us look at them further.
A traditional IRA allows you to contribute up to $6,000. Individuals older than 50 can make contributions of up to $7,000. The contribution is tax-deductible.
Roth IRAs are similar to traditional IRAs except that tax is deducted upfront for Roths IRA contributions. The advantage of Roth IRA is that the after-tax contributions and the interest earned are not subjected to any further taxes during withdrawal.
A SEP IRA is sponsored by employers or self-employed people. In essence, it is set-up by private entities. SEPs are easy to set up, have low running costs, and give the employer flexibility to determine the amount of contribution.
A SIMPLE IRA is a retirement savings plan designed for small businesses that have fewer than 100 employees. The retirement contributions are lower for this account.
IRAs accounts are penalized if a withdrawal is made before the age of 59.5 years. It is also good to note that rules regarding the maximum contributions and limits change every year.
401(k) retirement plans are defined-contribution plans where the employer makes matching contributions to the employee contributions. The earnings are taxed at the point the employee withdraws the money. There are two types of 401(k)-traditional and Roth. They differ in their mode of taxation.
A 457(b) plan applies to state and local government employees. A 403(b) is available for both private nonprofit organizations and government employees, including public school employees.
Health Savings Accounts (HSAs)
If your savings goals are for health care, then you should consider these accounts. An HSA is in many ways like a personal savings account. However, it can only be used for qualified healthcare expenses. These accounts offer tax advantages as contributions are made on a pre-tax basis leading to lower overall health costs.
A person who has a high-deductible health plan may qualify for HSAs. HSAs have benefits that include:
- Third parties can contribute to this account
- Contributions made attract various tax benefits and savings
- Money left in HSA at the end of the year can be utilized in the following year
- Most HSAs issue a debit card which increases convenience in payment of expenses
HSAs, however, have disadvantages such as:
- An individual is required to have a High-Deductible Health Plan which increases the financial burden.
- A penalty of 20 percent and payment of taxes if withdrawal is made before the age of 65 for non-qualified expenses.
Important Tips when Choosing a Savings Account Type
Savings accounts are not created equal. Here are some considerations when searching for the best possible savings account.
- There is an argument that savings accounts are not the place to keep money that you want to grow hence a low interest-rate offered is acceptable. But we would like to submit that if you can find a higher interest rate, take it.
- You are better off with an account that does not charge high (or any) monthly fees. Savings accounts are not worth the trouble.
- Savings accounts with the lowest minimum deposit will offer you greater flexibility. Go for it.
- How easily can you access your money in case of an emergency? You should consider the savings account that offers the greatest ease with the lowest penalty.
So here are the types of savings accounts and what you need to know about them.
When it is time for you to open a savings account, there are so many options out there. What makes sense for you would depend on your needs and financial goals. For instance, some consideration would be the level of access to the money that you need. Another could be the interest rate. A good thing to remember is that it is possible to open more than one account to get the maximum benefit.