While all savings accounts serve the purpose of holding your money, they don’t exactly function the same way. Here’s a breakdown of the four most common savings accounts.
Deposit or Regular Savings Accounts
This is probably the one that comes to mind first. A deposit savings account is usually paired with a checking account, providing the added benefit of overdraft protection. This account usually requires a lower minimum balance which in turn provides a lower interest rate. This makes it a great option if you don’t have a large amount to start saving with and you’re not too concerned with growing your savings quickly. Deposit savings accounts are also a good fit if you’re looking to have more access to your funds and want to withdraw and transfer funds at ATMs, branches, online, etc.
Great option for: short-term goals like building an emergency fund and saving for a vacation.
Money Market Savings
Money Market Savings provides you with a higher interest rate, but it usually requires a higher minimum balance to maintain. Banks and credit unions generally offer tiered options depending on your initial deposit; earning better interest rates in exchange for the ability to maintain a higher balance requirement. Just like the deposit savings account, you can also access your funds at ATMs, branches and even write checks to your money market savings account.
Great option for: medium-term goals like auto and home down payments.
If you’re looking to earn a higher interest rate and don’t need to access the funds that you’re saving, then you might want to consider a certificate account (CD). This type of account requires you to secure your money for a set amount of time called a term. The longer the term, the better the interest rate. When the certificate matures, you can withdraw your funds or roll them over into a new certificate account with a new term. While certificate accounts offer higher interest rates than the other savings accounts on this list, it does come with some access limitations. Withdrawing money before the end of your term will result in penalty fees, so it’s important to consider liquidity if that’s a factor in your financial plan.
Great option for: medium to long-term goals like saving for college or a wedding.
Specialty Savings Accounts
While some savings accounts come with money earning interest rates, specialty savings accounts come with tax benefits. The two most common specialty savings accounts are individual retirement accounts (IRAs) and Health Saving Account (HSA). Retirement accounts can be broken down into two options around taxes: a traditional IRA and a Roth IRA. A traditional IRA allows you to defer taxes on your contributions and deduct the amount of your contribution on your federal income tax return for the year. A Roth IRA gives you tax-free withdrawals in retirement. A health savings account is geared towards helping you save and pay for any medical expenses like copays, medication and more.