Buzz
If you're someone who frequently transfers money between accounts, chances are you've encountered a penalty for exceeding the transaction limit. When I faced this issue, I was frustrated with my bank. However, it's actually the Federal Reserve that imposes the six-transaction limit on your savings account. But why is this the case?
Referred to as “Regulation D,” the six-transaction restriction applies only to specific types of transactions. It's mainly for preauthorized or automatic withdrawals from a money market savings account. You can find the full list of rules from the Fed here (and there's a helpful chart breaking it down here). Personal finance expert Jim Wang offers an explanation as to why this is the case:
Your savings account is classified as a 'savings deposit,' which has a 0% reserve requirement, unlike a 'transaction account,' which has a 10% reserve requirement. A reserve requirement refers to the percentage of the account balance a bank must keep on hand and not lend out. For instance, when Emigrant Direct receives your $1,000 in a savings account, it doesn't need to set aside any of that for reserves. It can lend out the entire amount because the reserve requirement is 0% for savings accounts (which explains the appealing interest rates). On the other hand, a checking account (a transaction account) requires the bank to retain 10% of the balance, assuming you will be making withdrawals more frequently.
In essence, Regulation D prevents you from using your savings account like a checking account. Banks must maintain a certain reserve, and when you start withdrawing excessively from your savings, it creates confusion. This makes it challenging for the Federal Reserve to determine how much a bank has in reserves and regulate appropriately.
If you’re unfamiliar with Regulation D, it’s something to keep an eye on, particularly if you do a lot of online banking. In the worst-case scenario, your account could be closed if you exceed the limit on automatic withdrawals. To learn more, check out Wang’s link below.
Photo by Tax Credits.
