Are Online Savings Accounts Safe?

What Is an Online Savings Account?

Online savings accounts allow you to bank from anywhere you have an internet connection at any time of day or night. The term "online savings account" typically refers to those offered by institutions that don't have a brick-and-mortar branch network and require all banking to be conducted online.

You can make deposits to and withdrawals from an online savings account or transfer funds to different accounts. These accounts make it easy to separate your savings from money you use to pay your monthly bills and cover routine expenses.

Learn more: Things to Know About Savings Accounts

Online Banking vs. Traditional Banking

Online-only banks often have higher interest rates and lower fees, which make them an attractive option for maximizing returns if you're willing to forego visiting a branch. They usually have low (or no) minimum balance requirements compared to traditional banks and credit unions, but you may not be able to make cash deposits.

If you opt for an online-only account, you'll need to do all your banking online, through the bank's mobile app or at participating ATMs. If you have questions or need help with your account, you won't be able to visit a branch. However, online banks typically provide 24/7 customer service by phone or online chat.

Are Online Savings Accounts Safe?

Online savings accounts are generally safe because banks and credit unions take steps to prevent unauthorized account access, including encrypting your data, monitoring accounts for fraud, enabling multifactor authentication and automatically signing you out of your account.

For maximum safety, it's crucial that you also take steps to keep your account secure, such as using a unique and complex password, avoiding unsecured Wi-Fi, enabling account activity alerts and not clicking on suspicious links or attachments in your email to avoid phishing attempts.

Some institutions also limit your liability for unauthorized online or mobile transactions as long as you report it right away.

Is an Online Savings Account FDIC-Insured?

Many traditional banks, credit unions and online-only financial institutions offer accounts insured by either the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA). If you're unsure whether a financial institution is covered, check the FDIC's BankFind database or NCUA credit union locator to learn more about its insurance status.

Accounts at banks and credit unions protected by FDIC or NCUA insurance are automatically insured for up to $250,000 per depositor, per account ownership category and per institution. However, the insurance only kicks in if the financial institution fails. It doesn't cover losses related to fraud or theft.

Amounts that exceed $250,000 in a single account category aren't insured. To avoid potential losses, consider keeping funds that exceed the $250,000 threshold at a different FDIC- or NCUA-insured institution.

Pros and Cons of Online Savings Accounts

Online savings accounts provide a safe and convenient option for stashing your cash, but they aren't without drawbacks. It's important to weigh both the pros and cons before opening one.

How to Choose an Online Savings Account

If you think an online savings account could help you reach your savings goals, here are some tips to help you choose the one that's best for you.

• Compare annual percentage yields (APYs). Although APYs are typically higher than those you'll find from traditional banks and credit unions, they may vary between institutions. Comparing rates can help you maximize your returns.
• Review fees. Online banks generally charge fewer fees than their brick-and-mortar counterparts. However, it's still important to review the fee structure of all accounts you're considering to minimize those you might incur.
• Evaluate accessibility. If you like the idea of being able to walk into a branch every now and then, opting for an account at a traditional institution that provides online access may be a good bet. If you're comfortable without a local neighborhood branch, find out how you can deposit and withdraw money from your account. Some banks may allow you to deposit cash through ATMs; others may only allow direct deposit, electronic transfers or checks.
• Check out customer service. Learn how you can get in touch with a representative if you have questions. Online banks typically offer support by phone, email and online chat.
• Make sure your account is insured. One of the biggest benefits of keeping your cash in a savings account is that it's safe. Opt for an FDIC- or NCUA-insured account to safeguard your funds against losses if the financial institution fails.
• Review security features. Find out what security measures the institution has in place to help prevent fraud and theft.

Learn more: Types of Savings Accounts

The Bottom Line

If you crave convenience and are hunting for higher interest rates and lower fees, an online savings account might be a better option than a traditional savings account. But if you prefer a more personal relationship with a bank or credit union and feel more comfortable knowing you can pop into your local branch, a traditional savings account might be the right choice.

Regardless of which type of account you pick, your money should be safe if the financial institution is federally insured.