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Savings accounts can be safe places to stash the money you don't plan to spend on everyday expenses.The best savings account for you depends on your needs and goals: saving for a large expense, building an emergency fund or tucking away some cash for a down payment on a new home, for example. Take a look at these seven different types of savings accounts to find the best place to keep your money.
1. Traditional Savings Account
Traditional savings accounts earn interest on the money you deposit and are available at banks and credit unions.
You can save money for the short or long term. But the interest rates, shown as annual percentage yields (APYs), may be lower than with some other types of savings accounts. The national rate on a standard savings account is 0.37% as of March 2023.
You can usually open a traditional savings account with no or a low minimum deposit and withdraw your money at any time, usually with no limitations. That said, some banks may limit you to six monthly withdrawals before you incur a penalty. Here are some key pros and cons to consider.
- Easy access to your funds.
- Simple to open your account online or in person. Some banks may require a minimum deposit to open your account.
- Earn interest on your deposits.
- Receive Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance for up to $250,000 per depositor.
- You may incur common bank account fees, including a stop payment fee or monthly maintenance fee.
- Any interest you earn on your savings account is considered taxable income, so you'll have to pay taxes on that interest.
- Traditional savings accounts earn a lower APY than other types of savings accounts.
2. High-Yield Savings Account
A high-yield savings account is a deposit account that offers a much higher APY than a traditional savings account—sometimes as much as 10 times as much—to maximize your savings. Some high-yield accounts offer annual returns in the 4% range. However, rates are variable, meaning they can go up or down based on the benchmark interest rate set by the Federal Reserve.
Many of the best high-yield accounts can be found online. So, this type of savings account is best if you don't mind managing your account over the internet or through mobile banking. Some of the pros and cons to consider may include:
Find High-Yield Savings Accounts
- You generally earn a much higher APY than with a traditional savings account, some money market accounts and certificates of deposit (CDs).
- Many high-yield accounts have zero or no fees and low (or no) minimum balance or minimum deposit requirements.
- Receive FDIC or NCUA insurance for up to $250,000 per depositor.
- Interest rates on high-yield savings accounts are variable, which means you could earn less or more interest.
- Many high-yield savings accounts are offered by online-only banks.
- You may have limited access to partner ATMs.
- Inflation may outpace the interest you earn, meaning your account could lose value over time.
3. Certificates of Deposit (CDs)
A certificate of deposit (CD) is a type of savings account that earns a fixed interest rate on a lump sum for a specific period of time. In return for locking up your money, you are offered a higher interest rate than other types of savings accounts.
At the maturity date, you can withdraw your funds without incurring a penalty. Withdraw your money before that date and you may have to pay a penalty in the form of a number of months' worth of interest. Some banks may waive this penalty.
CDs are great options to save over time, but consider the drawbacks as well.
- CDs often offer higher interest rates than some high-yield savings and money market accounts.
- There generally isn't a monthly maintenance fee.
- Receive FDIC or NCUA insurance for up to $250,000 per depositor.
- You may be penalized if you withdraw your money early.
- If consumer prices rise, the CD rates may not be high enough to keep up with inflation.
- CDs may not be the fastest way to grow your money if you're looking for quick returns.
4. Money Market Accounts
Money market accounts are interest-bearing accounts offered by banks and credit unions. They can be used to meet your short- and long-term savings goals. You can withdraw money at any time from your money market account using checks or a debit card, although some banks may place limits on how many withdrawals you can make without incurring a fee.
Your bank or credit union might also require a minimum deposit when opening your account. Although convenient, money market accounts also have a few drawbacks.
- Your money is usually available whenever you need it.
- Many money market accounts allow you to write checks on the account.
- Many money market accounts offer competitive rates higher than traditional savings accounts.
- Your money market account is secure if the funds are held in an FDIC- or NCUA-insured bank or credit union up to $250,000 per depositor.
- Some high-yield savings accounts offer higher rates than certain money market accounts.
- It's possible you may be restricted to six withdrawals per statement cycle at certain banks.
- You may have to meet the account's minimum balance requirements to earn the advertised APY.
5. Savings Bonds
Both Series EE and Series I savings bonds are issued by the U.S. Department of the Treasury. Savings bonds are considered a safe, longer-term investment, and while the money in your bond is subject to federal taxes, it is not subject to state or local taxes when you cash it in. In fact, you may also get a federal tax deduction if you use your bond to pay for higher education at an eligible college or university.
Savings bonds are primarily sold online. Before considering a savings bond, take a look at the pros and cons.
- Both I and EE savings bonds earn interest monthly.
- Series EE bonds are guaranteed by the government to double in value if you hold them for at least 20 years (30 years is the maturity date).
- You are guaranteed to get back the full value of your savings bond plus interest if you keep it until maturity.
- There is a purchase limit of $10,000 on both electronic Series EE and Series I bonds—$20,000 total in any one year. You can purchase another $5,000 in paper I bonds annually.
- Savings bonds are meant for long-term savings. You can redeem your bond after one year, but you will lose three months of interest if you do.
- You won't receive statements, so it may be easy to forget you own a savings bond.
6. Cash Management Account
Cash management accounts (CMAs) are nonbank accounts that let you manage your money and combine some of the same features of savings, checking and investment accounts all in one place. They typically earn competitive interest rates and you can withdraw your money at any time with no penalty. CMAs also have very few (if any) account or ATM fees, although this can vary depending on the financial institution.
Nonbank institutions cannot offer FDIC insurance coverage. However, they may be linked to third-party banking partners that can. Because CMAs combine several services into one, you can often pay your bills online, deposit a check via a mobile device, set up direct deposit or even link a debit card to your account. Along with the benefits of CMAs, there are also a few disadvantages.
- CMAs allow you to seamlessly manage your investments and banking accounts all in one place instead of many.
- CMAs earn interest on the money you deposit. APYs are competitive and may provide more interest than interest-earning checking accounts.
- If your CMA is linked to many partner banks, it may be insured for more than the legal maximum FDIC insurance.
- You won't find the face-to-face customer service or range of services you'd get at a bank or credit union.
- Some CMAs have high minimum balance requirements compared to standard savings and checking accounts.
- CMAs typically offer lower rates than with other savings account options.
7. Health Savings Accounts (HSAs)
Health savings accounts (HSAs) let you set aside money to pay for health-related expenses. As long as you use the money to pay for qualified medical expenses—copayments, coinsurance, deductibles and more—you can withdraw it tax- free.
You must be covered by certain high-deductible health care plans to contribute to your HSA, and you can't contribute if you have Medicare coverage or if you have a plan that doesn't require copayments or deductibles to be paid first. Although your monthly premium may be lower with an HSA, you may pay more health care costs overall before your insurance kicks in.
Each year, the IRS sets the maximum contribution limits. For 2023, you can contribute $3,850 for individual coverage or $7,750 for family coverage. At age 55, you can contribute an additional $1,000 each year. HSAs offer tax advantages but also have a few cons to consider.
- Many health insurance companies, some banks and other financial institutions offer HSAs for their high deductible health care plans.
- Contributions to your HSA are tax-free. Withdrawals from your HSA are not subject to federal (sometimes state) taxes, if used for qualified medical expenses.
- Any contributions to your HSA stay with you for future qualified medical expenses even if you leave your employer, retire or change health insurance plans.
- You must be enrolled in an HSA-eligible health plan to contribute to an HSA.
- If you withdraw the money before the age of 65 for non-qualified expenses, you may end up paying a 20% tax penalty along with incurring an income tax liability.
- Some HSA plans charge monthly maintenance fees.
The Bottom Line
It pays to be prepared. So, setting up any type of savings account and building an emergency fund are excellent first steps to ensuring a secure financial future. But choosing the right account for you will take comparing the various options and balancing the pros and cons of each. It's important to remember that you don't need to pick just one way to save, and multiple accounts may help you meet your savings goals faster.
At the same time, don't forget about your credit. A good credit score may give you more options for handling a financial emergency. To see where you stand, get your free credit report and credit score from Experian.