What Are the Basic Bank Account Types?

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.

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

• Checking accounts
• Savings accounts
• Money Market accounts
• Certificates of deposit (CDs)
• Individual Retirement Accounts (IRAs)

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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