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Deposit accounts are standard bank accounts that allow you to deposit money and withdraw funds. They can be used for everyday transactions, as well as short- and long-term saving. Some deposit accounts earn interest, which can help your money grow. There are four main types of deposit accounts, and each one works a little differently. Understanding how they work can help you choose bank accounts that make the most sense for you.
What Is a Deposit Account?
You can deposit money into this kind of account and withdraw funds, though certain deposit accounts have rules around how that works. For example, certificates of deposit (CDs) typically don't allow you to make additional deposits after the account is opened. You might also be penalized for withdrawing funds before the term ends. But CDs do earn interest, making them an attractive low-risk investment. Other deposit accounts allow for more flexibility, but may not earn interest. A checking account is a good example.
Deposit accounts are available at financial institutions like banks and credit unions, which may operate through brick-and-mortar locations or online. If held at a bank, deposit accounts are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor, per insured bank. Credit unions provide similar coverage through the National Credit Union Administration (NCUA).
Types of Deposit Accounts
Checking Account
Checking accounts are designed for frequent transactions like day-to-day spending and paying bills. Money tends to move in and out on an ongoing basis. This type of deposit account comes with a debit card and checkbook, making it easy to withdraw funds as needed without penalty. Online banking is common, and some checking accounts also offer overdraft protection. Transactions will be authorized even if there isn't enough money in the account to cover them, but you'll be charged a bank fee per transaction.
Savings Account
Savings accounts offer incentives to encourage people to save. That includes paying interest on your balance. Annual percentage yields (APYs) vary, but the FDIC puts the average rate on a traditional savings account at 0.42%. High-yield savings accounts, which are typically offered by online banks, are known for their above-average rates. Some currently have APYs over 5%. This kind of savings account can be a good place to keep your emergency fund.
While they don't come with a debit card or checkbook, savings accounts offer easy access to your money via online transfers and ATMs. Just know that some financial institutions limit free electronic transfers and withdrawals. Every savings account is different, but six per month is common.
Find High-Yield Savings Accounts
Certificate of Deposit (CD)
A CD rewards you for leaving your money in the account for a predetermined amount of time. Pulling money out before the term ends will likely result in a fee. CDs aren't known for their liquidity, but they can be a good place to hold funds you don't plan on using right away—like money you're setting aside for a medium- or long-term financial goal. APYs tend to outperform high-yield savings accounts, with current yields as high as 5.5%.
CD terms range anywhere from one month to five years, and rates vary from one financial institution to the next. There are also different types of CDs. Some allow you to adjust the interest rate if rates increase after you've opened the account. Others are designed specifically for retirement savings.
Money Market Account
A money market deposit account is like a mix between a checking and savings account. Most come with a debit card or checkbook to make for easy withdrawals. At the same time, you'll earn interest on your balance. APYs vary but some currently top 5%. Like a savings account, you may be limited when it comes to monthly electronic withdrawals and transfers. Some money market accounts also have minimum balance requirements and maintenance fees.
That said, this type of deposit account can be a logical place to keep your emergency fund or money you use to pay certain bills each month. For example, you could set up autopay and have your mortgage payment automatically deducted from the account.
Deposit Account vs. Checking Account vs. Savings Account
"Deposit account" is an umbrella term that covers four main types of bank accounts. Checking and savings accounts often go hand in hand. Many financial institutions link them through online banking, though electronic withdrawals and transfers out of your savings account may be limited.
| Four Types of Deposit Accounts | ||||
|---|---|---|---|---|
| Checking Account | Savings Account | CD | Money Market Account | |
| Best for | Daily transactions, regular spending and paying bills | Cash reserves such as an emergency fund | Setting aside money you won't need in the short term for a medium- to long-term financial goal | Emergency fund or money you're saving for a specific financial goal |
| Pros | Easy access to your money and low (or no) fees | Allows you to earn interest on your cash savings | Competitive APYs if you give up access to your funds until the account matures | Combines the liquidity of a checking account and the interest-earning power of a savings account |
| Cons | Earns no or low interest | May limit electronic transfers and withdrawals | Pulling money out early will likely result in a penalty | May limit electronic transfers and withdrawals |
Does Every Deposit Account Earn Interest?
While savings accounts, CDs and money market accounts earn interest, checking accounts generally do not. APYs can vary widely depending on the account type and financial institution. Shopping around and comparing rates and terms can help you find the best deposit account for you.
The Bottom Line
Deposit accounts are insured bank accounts that come in several shapes and sizes. When it comes to managing your finances, checking accounts and savings accounts are essential. CDs and money market accounts are considered low-risk investments that might help grow your wealth a little faster.
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