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Some people think banks just offer checking and savings accounts, but there are actually other types of bank accounts that financial institutions commonly offer.
There are lots of things you can do with your money: You could deposit all of it into a checking account so you can spend and make deposits easily and often; you could split your money among different types of accounts to earn interest or dividends from investments; or you could cash your paychecks and store your money under your mattress (we don’t recommend that last option).
Here are six common types of bank accounts and how to use them. Keep in mind that accounts can come with all sorts of fees, so be sure to read the fine print and do your homework before opening a new account.
Bank accounts at a glance
|Account type||Why you might want it|
|Checking account||You want unlimited access to your money and you’re not concerned with earning interest.|
|Savings account||You don’t need constant access to this money and can afford to leave it in a secure account where it will earn nominal interest.|
|Money market account||You want a blend between a checking and savings account and only need limited access to this money each month.|
|Certificate of deposit (CD)||You want a secure way to invest your money for a set period of time.|
|Individual retirement arrangement (IRA)||You want a tax-deductible or tax-deferred way to invest your money for retirement.|
|Brokerage account||You want to invest your money but don’t want to be penalized for taking your money out before the age of 59½.|
Checking accounts allow you to have easy, day-to-day access to the money you deposit into them. There are usually no minimum account balances required — you just have to keep enough money in your account to cover your purchases. This is important to avoid overdrawing your account. Overdrawing your account means that you’ve spent more than you have in the checking account, and your bank pays the full amount of your purchase. When you overdraw your account, you almost always have to pay fees.
Savings accounts allow you to earn interest on the money you deposit. But as the name suggests, these accounts are meant for saving money. So there is a restriction on the number of certain types of withdrawals or transfers you can make in a month and usually a daily minimum balance requirement. Earning interest sounds great — who wouldn’t want to earn money just for having money? Keep in mind, though, that the interest your account earns is considered income and is therefore taxable.
A money market account is a cross between a savings and checking account. Banks typically offer a higher interest rate on money market accounts than on savings accounts, and can also give you limited monthly access to your money via checks and a debit card. You can only make up to six withdrawals or transfers of a certain type from a money market account per month — and, fortunately, just like savings accounts, neither ATM nor in-person withdrawals or transfers count toward the six-withdrawal limit. The interest rate you earn can depend on the amount you have deposited.
Certificates of deposit can be a low-risk way to invest your money for a specified period of time at either a fixed or variable interest rate. CDs are considered low risk because if you get one with a fixed interest rate, you’re guaranteed to earn that percentage rate on your deposit until your CD matures. Typically, CDs with longer periods offer higher interest rates. That means a CD that matures in five years will typically earn interest at a higher rate than a CD maturing in two years. CDs are often attractive savings tools because they typically earn higher interest rates than a traditional savings account. One thing to keep in mind is that CDs have early withdrawal fees. If you withdraw money from the CD before it matures, the fees can be expensive.
An individual retirement arrangement (also known as an individual retirement account) is a savings tool the IRS created as a way to give people an easy avenue to save for retirement. Contributions to IRAs are limited to $5,500 per year except if you are age 50 or older, at which point you can invest an additional $1,000 per year. Like other retirement accounts, such as a 401(k), deposits made into an IRA are intended to stay in the account until the account owner turns 59½ years of age. Early withdrawals typically trigger some sort of penalty.
There are two main types of IRAs: a Roth IRA and a traditional IRA.
- Deposits are made after taxes and are not tax-deductible.
- There is no age limit on when you must start withdrawing the specified minimum amount from your account.
- Contributions can be tax deductible.
- Earnings are tax-deferred.
- Your withdrawals will be taxed.
You are not allowed to make contributions starting the year you reach age 70½ and must begin withdrawing the required minimum amounts shortly thereafter.
Brokerage accounts give you another way to invest your money. With a brokerage account, you can invest in stocks and bonds. You can earn money buying stocks if you sell them at a price that’s higher than when you bought them. You can also earn dividend payments, which is when a company distributes some of its earnings to shareholders.
Brokerage accounts are considered higher risk because the value of your stocks can go down, meaning that you could lose money if you sell them at that lower price. But brokerage accounts also have the greatest potential to grow over the long haul. So if you want to earn the most you can with your money and you can afford to take the risk, a brokerage account might be right for you.
Most banks offer a variety of accounts where you can put your money. Different account types help you achieve different goals, so it’s important to be clear about your needs and which bank accounts meet those needs.