What Are the Basic Bank Account Types?

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ByAlvin Yam, CFP
Edited byVictoria Copans
ByAlvin Yam, CFP
Edited byVictoria Copans

Updated: May 23, 2024

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Bank accounts provide a convenient and secure way to manage your money, whether online, at a traditional bank or at a credit union. Online banks and credit unions generally provide higher interest rates on savings accounts compared to traditional banks.

Different account types cater to various needs, like spending (checking accounts), short-term saving (savings accounts), higher interest rates (money market accounts), long-term investing (certificates of deposit) or tax advantages (Individual Retirement Accounts). The right account depends on your specific financial goals.

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Basic Bank Accounts Explained

Specific account options may differ across banks, but most banks typically provide a range of basic account types. We cover the following:

Checking Account

A checking account is a basic bank account designed for daily transactions such as paying bills, making purchases and receiving direct deposits. Checking accounts offer multiple options to receive money electronically, such as direct deposit from employers or government benefits, mobile check deposit by taking a picture of the check and ACH transfers from other accounts.

Checking accounts are ideal for managing everyday expenses and ensuring your funds are readily available. However, they typically offer little to no interest earnings, making them less suitable for long-term savings goals.

Pros
Cons

Easy access to funds for daily transactions

Little to no interest earned

Checking accounts can come with a debit card that allows you to make purchases anywhere that accepts those cards for point-of-sale (POS) transactions

Potential fees for certain services or account maintenance

No or low minimum balance requirements

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HIGH-YIELD CHECKING ACCOUNTS

While standard checking accounts typically provide minimal to no interest on deposits, high-yield checking accounts offer the opportunity for account holders to earn a relatively attractive annual percentage yield (APY) on their balances. Banks and credit unions may require you to meet specific criteria, such as maintaining a significant minimum balance, enrolling in direct deposit or completing a specified number of transactions to qualify for the highest APYs.

Savings Account

A savings account is a deposit account that allows you to earn interest on the money you save. Savings accounts offer a valuable tool for building an emergency fund with easy access to your money when needed. They also provide a dedicated place to accumulate savings for other major goals like a down payment on a home, upcoming expenses like college tuition or a big trip. With interest earned, your savings can slowly grow without excessive risk.

Pros
Cons

Earn interest on your savings

Lower interest rates than some other accounts

Easy access to funds

Transaction limits

Potential fees for excessive withdrawals

Money Market Account

A money market account is a type of savings account that typically offers higher interest rates than a traditional savings account but with stricter requirements, such as a higher minimum balance.

Like a savings account, a money market account earns variable interest on your deposited funds, often at competitive rates higher than standard savings. At the same time, money market accounts provide more flexibility by allowing limited transactions and withdrawals, unlike the stricter limits on a regular savings account. However, your bank may still cap the number of certain transfers or withdrawals per month.

Unlike standard savings accounts, many bank money market accounts allow for limited check-writing abilities.

Pros
Cons

Higher interest rates than savings accounts

Higher minimum balance requirements

Some money market accounts provide flexibility similar to checking accounts

Transaction limits

Potential fees for excessive transactions

Bank Money Market Account vs. Money Market Fund

While their names are similar, bank money market accounts and money market mutual funds are different. A bank money market account is a type of savings account offered by banks and credit unions.

Money market accounts at banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per institution. Money market accounts at credit unions are insured by the National Credit Union Administration (NCUA) up to the same $250,000 limit.

A money market mutual fund is an investment offered by mutual fund companies, not banks. These funds aim to maintain a $1 per share price, but the value can fluctuate. Money market funds are not FDIC insured. The fund's value can potentially decline below $1 per share.

Certificate of Deposit (CD)

Certificates of deposit are time-restricted deposit accounts that offer higher interest rates than traditional savings accounts in exchange for locking your funds for a predetermined period, known as the term.

Terms for CDs can range from a few months to several years. The key advantage of CDs is the ability to lock in a fixed, often higher interest rate for the duration of the term, allowing your savings to grow at a guaranteed rate. However, access to the deposited funds is restricted until the CD matures, with early withdrawal typically resulting in penalties.

Pros
Cons

Higher fixed interest rates than savings accounts

Limited access to funds until maturity date

Low-risk, federally insured investment option

Early withdrawal penalties reduce earned interest

Guaranteed returns if held to maturity

Interest rates may be lower than other investment vehicles

Safe way to lock in a rate and grow savings

Forgoes ability to take advantage of rising interest rates during CD term

Individual Retirement Account (IRA)

Individual Retirement Accounts (IRAs) are investment accounts designed to help individuals save for retirement with the benefit of tax advantages. Types of IRAs include Traditional and Roth IRAs, each with distinctive features and benefits.

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The Internal Revenue Service (IRS) sets annual contribution limits for both Traditional and Roth IRAs, which are periodically adjusted to account for inflation and cost-of-living increases.

The value of your IRA is directly tied to the performance of its different investments. Since IRAs hold uninsured investment products, there is a risk of potential losses depending on how the underlying assets perform. The amounts in your IRA accounts are not protected against market fluctuations and investment losses.

Pros
Cons

Tax-advantaged growth compounds for decades until retirement

Early withdrawal penalties apply before age 59.5 in most cases

Wide range of investment options for diversification

Annual contribution limits cap how much can be saved

"Catch-up" contributions allowed for those 50 and older

Income limits phase out Roth IRA contribution eligibility at higher incomes

Supplement employer retirement plans like 401(k) plans

Required minimum distributions from Traditional IRAs after age 72

Roth IRAs enable tax-free withdrawals in retirement

Bank Accounts With the Best Interest Rates

Typically, money market accounts and high-yield savings accounts offer the best interest rates of the basic bank account types.

Online banks tend to offer higher rates than traditional brick-and-mortar banks to attract customers. This is often due to the lower operational costs associated with online banking, as they don't have the overhead expenses of maintaining physical branches. Online banks can pass on the savings to their customers in the form of competitive interest rates.

Certificates of deposit (CDs) can also provide attractive rates, especially for longer-term CDs, but the downside is that your money is less liquid. Checking accounts and standard savings accounts generally have the lowest interest rates among bank accounts.

What Type of Bank Account Is Best for You?

When choosing between the different types of bank accounts, decide what features matter most to you before even choosing a bank. The best type of account will depend on your financial needs, your spending habits, your location and your investment horizon. You should only consider signing up with banks and credit unions with federal deposit insurance.

Account Type
Minimum Balance
Earns Interest?
Transaction Limits
Withdrawal Limits
Other Features

Savings Account

Often no minimum or very low

Yes, typically low interest rates

Limited monthly transactions

No limits

FDIC or NCUA insured, good for emergency funds

Checking Account

Often no minimum or low

No, or very low interest

Unlimited transactions

No limits

FDIC or NCUA insured, used for daily transactions

Money Market Account

Higher minimum balance

Yes, higher interest than savings accounts

Limited monthly transactions

No limits

FDIC or NCUA insured, good for emergency funds

Certificate of Deposit (CD)

Minimum deposit amount

Yes, higher interest rates than savings accounts

No transactions until maturity

Early withdrawal penalties

FDIC or NCUA insured, good for long-term savings

Individual Retirement Account (IRA)

No minimums, while contribution limits are set by IRS

Funds invested may earn interest or dividends

No transaction limits within the account

Penalties for early withdrawals

Tax-advantaged retirement savings

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HIGHER INTEREST RATES AT CREDIT UNIONS

Credit unions, as not-for-profit member-owned institutions, generally provide higher interest rates on savings accounts and fewer fees than traditional banks.

Fees by Bank Account Type

There are different fees to maintain different kinds of accounts. Some banks and credit unions may offer special deals or waive certain fees if you meet special eligibility criteria. For example, a bank might waive an annual saving account service fee if you meet their minimum balance requirements.

Account Type
Fees

Checking Accounts

Monthly maintenance fees, overdraft fees, ATM fees, check-ordering fees

Savings Accounts

Excessive withdrawal fees after limit, sometimes monthly service fees

Money Market Accounts

Monthly fees if minimum balance not met

Certificates of Deposit (CDs)

Early withdrawal penalties if closed before maturity

Individual Retirement Accounts (IRAs)

Some banks may have account opening or annual fees Fees for transferring/rolling over IRA assets to a new IRA provider Transaction fees for buying/selling investments within an IRA Some banks may charge termination fees for closing an IRA account

How to Open a Bank Account

Many of the best banks offer a simplified, straightforward process for opening an account. You can prepare yourself by taking the following steps:

1
Research online and local options and choose a bank or credit union.
2
Decide on an account type(s) based on your goals and needs.
3
Decide if you want to open your account online or in-person.
4
Prepare to provide personal identification (such as a driver's license or passport), your Social Security number and an initial deposit.
5
Submit an application and wait for approval.
6
Fund your account with an initial deposit and order checks and debit cards needed.
7
Learn about your bank or credit union’s online and mobile banking features to easily manage your new account.

FAQ About the Types of Bank Accounts

Each type of bank account has distinct and specific purposes. We answer some of the most common questions about different account types.

What type of bank account is best?
What type of bank account has the highest interest rate?
Should I deposit money into my checking or savings account?
How do I check if my account is a savings or checking account?
Does having a bank account build credit?
What are the fees associated with different bank accounts?
Can I switch between bank accounts or banks?
What happens to my bank account if the bank goes out of business?
How can I manage my bank accounts effectively?

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner with over 15 years of experience working with individuals and corporations. He is an expert in wealth management and personal banking. Alvin is also the Founder and Managing Partner at Paraiba Wealth Management, an independent registered investment advisor.

Prior to founding Paraiba, Alvin spent five years as a Director at HSBC overseeing retail and wealth products, and was also a Financial Consultant at Charles Schwab, advising clients on investments, retirement planning and banking products.


sources
Shield Insurance

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.