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Most people are familiar with checking and savings accounts, which are standard options. However, there are several other types of accounts that banks and credit unions offer. We've compiled an overview of the basic account types to help you determine which might best suit your needs.
Standard Checking and Savings Accounts
These are likely accounts you already know about, but let’s begin with the basics of checking and savings accounts. A standard checking account is a convenient place to keep your money—it allows you to move funds around easily. We've discussed the features of a solid checking account before, but here’s a quick recap of what to look for:
No monthly fees
No minimum balance requirements
Unlimited transactions
Online and mobile access
Free ATM usage
These have become quite standard features. While some checking accounts may come with fees, it’s fairly easy to find one without any. In fact, The Simple Dollar has compiled a list of five of "the best" no-fee checking accounts:
Capital One 360
EverBank Yield Pledge
Ally Interest Checking
GoBank
Bank5 Connect High Interest Checking
Similar to checking accounts, savings accounts are also intended to be liquid, which means you can access your funds whenever you need them.
Here are a few important features to consider when choosing a savings account, as recommended by Forbes contributor Laura Shin:
Federal Deposit Insurance
Easy access to funds
Attractive interest rates
Online and mobile access
Basic savings accounts typically offer very low interest rates, making them less than ideal for growing or investing your money (though they were never particularly great for that in the first place). However, they serve as a good option for overdraft protection or as a safe place to store your emergency fund. Some online banks, however, offer slightly higher interest rates than traditional big banks. For instance, Ally Bank is known for offering a 0.87% annual percentage yield on their high-yield savings accounts.
Get Rich Slowly provides a tool that tracks the top 50 online high-yield savings accounts, updated weekly. As of this post, the list includes:
Ultima Bank—2.02% APY
Washington Savings Bank—1.26% APY
Dollar Bank Federal—1.05% APY
Visit the full list to explore more details and additional options.
Interest-Bearing Checking Accounts
Yes, some checking accounts do offer interest. But don’t get too excited—rates are generally pretty low.
For instance, Ally offers an interest-bearing checking account with a 0.10% Annual Percentage Yield (APY). This is quite minimal; if you have $1,000 in your account, you’ll earn roughly a dollar over the course of a year.
If your balance exceeds $15,000, they’ll bump up the APY to 0.60%. However, most experts—and even beginner investors—would argue that $15,000 is far too much to leave sitting in a low-interest checking account. Your money would be better placed in a CD, brokerage account, or even a higher-yield savings account (after all, Ally’s savings account offers a 0.87% APY, so there’s no real benefit to storing more funds in the checking account).
NerdWallet has compiled a list of interest-bearing checking accounts from various banks and credit unions. It’s worth checking out, though keep in mind that none of these accounts surpass the one percent APY threshold. Still, a few offer rates that are competitive with savings accounts.
Certificates of Deposit (CDs)
A Certificate of Deposit (CD) is another option for saving money. These are typically time-based investments, with terms that range from three months to five years. If you withdraw your money before the term ends, you usually face a penalty.
Because of this lock-in period, CDs often offer a higher interest rate than traditional savings accounts. While the difference isn’t massive, the rate tends to increase with the length of the CD term.
NerdWallet outlines the most common types of Certificates of Deposit:
Variable rate: Your interest rate could change over time, potentially increasing.
Low or no penalty: You won’t face penalties for early withdrawal, though the interest rate may be lower as a result.
Callable CD: The bank or credit union has the right to shorten the CD’s term.
Jumbo CD: Designed for large balances ($100,000 or more), offering higher rates.
IRA CD: Regular CDs that are held within an IRA account.
CDs can also be structured in a ladder system. With this strategy, you start by investing in a short-term CD, and over time, you reinvest in longer-term CDs.
CD interest rates typically aren’t much higher than those offered by a basic savings account, but if you’re interested in finding one, Nerdwallet provides a list of the best CD rates.
Money Market Accounts
A money market account is a type of account that offers a higher interest rate compared to a standard savings account.
Like a savings account, a money market account is FDIC insured. However, beyond the higher interest rates, there are some key differences between money market accounts and traditional savings accounts.
For starters, there are fewer restrictions on a money market account. A bank has the ability to invest your funds in things like treasury notes, bonds, CDs, and other safe, conservative investments. Additionally, money market accounts usually require a higher minimum balance, and they come with other limitations. The Simple Dollar explains:
Money market deposit accounts often come with additional restrictions and benefits. Some accounts may require a minimum balance, while others may have a waiting period (up to seven days) before withdrawals can be made. However, certain money market accounts allow you to write checks from the account, typically up to three per month. Be sure to review the specific policies of any money market account you're considering to understand these potential restrictions and features.
It’s important to note that money market deposit accounts should not be confused with money market funds. Unlike deposit accounts, money market funds are investments and are not covered by FDIC insurance.
IRAs
An Individual Retirement Account (IRA) is exactly what it sounds like—an account designed for saving money for your retirement.
There are two main types of IRAs: Traditional and Roth. Roth IRAs require you to pay taxes on your contributions upfront, whereas traditional IRAs allow you to pay taxes on the money when you withdraw it in retirement. This is a simplified explanation—more details about the differences can be found here.
Here are the reasons why you might want to invest in an IRA, according to Fidelity:
Tax-deferred or tax-free growth
More investment options than what's available through your employer's plan
Additional savings outside of your employer's plan
To open an IRA, your first step is selecting an investment firm such as Fidelity or Vanguard. NerdWallet also offers recommendations for where to open an IRA account. After that, you can apply online, choose the funds to invest in, and transfer money from your bank account to purchase those funds.
It’s crucial to remember that if you’re transferring an IRA from an old employer account, this process has specific rules that differ by company. Make sure to follow these rules carefully to avoid unnecessary taxes on the rollover funds.
We delve deeper into this process in our beginner's guide to the IRA.
Brokerage Accounts
If you're looking to invest outside of a retirement account (or have already maxed out your contributions), you may consider opening a brokerage account. This type of account allows you to invest in the stock market without using a 401(k) or IRA.
Daily Worth explains:
With a brokerage account, you can trade stocks, bonds, mutual funds, exchange-traded funds, and other investments — sometimes without paying taxes on the gains. While you open the account through a broker, you have the freedom to make your own investment choices. Depending on the broker and account type, the commission (or fee) can be as low as $5 to $10 per trade.
Just like with an IRA, you can set up a brokerage account through investment companies like Fidelity, Scottrade, E-Trade, and others. Visit Daily Worth’s full post for further details on the various types of brokers available.
There are a few things to consider when it comes to brokerage accounts. Some brokers charge a commission for each trade, typically between $5 and $10. However, if you trade using the firm’s own funds, they might waive the fee. For instance, if I invest in Vanguard's VTSAX index fund, there’s no commission involved.
Fidelity points out that when choosing a brokerage account, you should ensure that there are no maintenance fees. Additionally, seek out a firm with low trade commissions. Many accounts also offer benefits like free checking, debit cards, and bill payment services.
These are the fundamental types of accounts you’ll encounter at banks, credit unions, and investment firms. Understanding the features of each one will help you determine the best place to manage your money.
