Which Savings Account Is Best For Your Financial Life?

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Jun. 5 2019, Published 8:02 a.m. ET

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Opening a savings account might sound simple, but there are many types of savings accounts available, for both individuals and businesses.

While checking accounts are intended for everyday purchases, savings accounts are meant to be accessed less frequently. Some are ideal for short-term savings, such as emergency funds, while others are better for long-term goals like retirement.

There are traditional and online savings accounts, as well as accounts that generate more interest but have more restrictions, such as money markets and certificates of deposit.

If you’re saving for health expenses, there are tax-friendly flexible spending accounts and health savings accounts. If you’re stashing cash for your children’s college education, there are 529 plans. Lastly, if your savings are for retirement, there are a few tax-advantaged plans from which to choose.

Not sure which type of savings account you need? Read on as we explain your options.

Traditional Savings Accounts

When you think of a savings account, this is likely the type that comes to mind. You can open one at a bank or credit union, usually with a low minimum.

You can typically contribute as much as you’d like — though it is usually insured only up to $250,000 — but it most likely doesn’t come with a debit card or checks. Also, due to federal regulations, you can only withdraw or transfer funds six times a month. Checking accounts don’t have these restrictions, which is why they can be better for day-to-day spending.

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While traditional savings accounts are often interest-bearing, their interest rates are usually very low — the average is 0.26% for brick-and-mortar banks and 0.23% for credit unions. Some financial institutions offer savings account bonuses, though there’s typically a minimum deposit required to qualify.

Online Savings Accounts

Online bank accounts are just as safe as those offered by brick-and-mortar financial institutions, and they usually come with higher interest rates and lower fees.

You can find interest rates for online-only savings accounts at 2.25% or above. Without in-person branches, they have lower overhead and can afford to pay out better APYs.

If you’re the type of person who prefers face-to-face transactions, stick with a traditional bank or credit union. But if your priority is nabbing a high interest rate to help your savings grow, an online savings account is a better option.

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Money Market Accounts

Depending on the bank, money market accounts can be nearly identical to regular savings accounts, said Ken Tumin, founder and editor of DepositAccounts, which, like MagnifyMoney, is owned by LendingTree. Both accounts have the same restriction on monthly withdrawals.

One of the key differences is that money market accounts sometimes offer limited check-writing capabilities or debit card transactions, Tumin said, though not all banks allow it. Money market accounts might also have slightly higher interest rates than regular savings accounts — especially if you go with an online-only money market account — but you might have to meet certain criteria.

Money market accounts are more likely than traditional savings accounts to have minimum balance requirements to open the account and monthly minimum balances if you want to avoid a banking fee, Tumin said.

But those differences and features are up to individual banks, Tumin said. So before you open a money market account, read the details carefully. If you run a business and need a place to park accessible savings, you can look into opening a business money market account.

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Certificates Of Deposit (CDs)

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Savings and money market accounts are ideal for emergency funds or short-term goals, but what if you’re more interested in growing your money and you don’t need to access it soon?

Consider a certificate of deposit, which keeps your money locked away for a set period — often anywhere from a few months to five years — in exchange for a higher interest rate than you’d find with a savings or money market account. The longer the term and the bigger your deposit, the better your interest rate will be.

If you have $100,000 or more to invest, you could opt for a jumbo CD, which sometimes offers a higher interest rate than a traditional CD.

A CD is ideal if you have a goal a few years off, such as a down payment on a house, Tumin said. “A CD can be better [than a savings or money market account] because you already have that lump sum and you want to maximize the interest rate on that,” Tumin said. “When it matures, you can access it and you can get a higher interest rate.”

While you can withdraw money from a CD early, most lenders charge a penalty. There are some no-penalty CD options. There are also financial institutions that offer bump-up or step-up CDs in which your interest rate rises over your term.

Tumin said others might use CDs as a conservative way to invest rather than put their money in stocksbonds and mutual funds. While your returns might not be as high as on the stock market, they’re guaranteed — and safer.

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One way to make the most of your returns is to set up a CD ladder, Tumin said. When you create a CD ladder, you stagger investments in multiple CDs that mature at different times, which lets you more readily access money. As they mature, you can roll them into more long-term CDs to keep your interest growing.

Health Savings And Flexible Spending Accounts

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If you expect to have medical expenses, health savings accounts (HSAs) and flexible spending accounts (FSAs) give you tax-advantaged ways to set aside savings for them.

You can only open an HSA if you have a high-deductible insurance plan as defined annually by the IRS, which is currently a deductible of at least $1,350 for an individual or $2,700 for a family.

“Contributions to HSAs generally aren’t subject to federal income tax, and the earnings in the account grow tax-free and can be taken out tax-free for eligible medical expenses,” said Matt Gellene, head of the financial center at Merrill Edge and a national performance executive at Bank of America Merrill Lynch. This helps you save money on out-of-pocket medical costs.

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There are annual limits on how much you can contribute. But unused balances carry over if you change jobs or stop working, Gellene said.

“You also have the ability to invest funds and earn interest if your balance exceeds $1,000,” he said. You might be able to open an HSA with your health insurance company, but they’re also offered by many financial institutions.

A similar account is an FSA, but you can only obtain one through an employer. The money doesn’t roll over annually, though some employers allow you to carry over up to $500 per year. Since your employer owns the account, you lose it when you leave, Gellene said. You also can’t invest the money elsewhere. But it’s an easy way to have pretax dollars automatically set aside from your paycheck for health care expenses.

It’s also important to note that you generally can’t contribute to these types of savings accounts in the same year, though there are exceptions.

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College Savings Accounts (529 plans)

College is extremely expensive, so 529 plans offer a tax-advantaged way to set aside and grow funds for your loved one’s future education. The rules for each type of 529 plan vary by state. But when the money is used for qualified education expenses, such as tuition, room and board, and books, withdrawals can be made without paying any federal taxes.

“The 529 plans allow investment earnings to potentially grow while remaining sheltered from federal and — possibly — state income taxes,” Gellene said.

These come in two types: savings plans, which allow you to invest for a higher education, and prepaid tuition plans, which allow you to purchase credits or units.

Prepaid tuition plans let you lock in tomorrow’s tuition at today’s rates, Gellene said, while savings plans “let you choose from a menu of investments and offer more return potential, as well as risk.” Be aware that, like any investment, they can lose money.

There are also private 529 plans, which can be used for participating private colleges.

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Retirement Accounts

Just like there are tax-advantaged accounts for health care and college, there are similar types of savings accounts for retirement.

If you have a full-time job, you can likely get a 401(k) account through your employer. Your contributions come out of your paycheck and reduce your amount of taxable income. Some employers will incentivize these plans by matching contributions.

“If your employer offers a traditional 401(k) plan, consider taking full advantage of any matches they offer,” Gellene said. “This is essentially free money that may make a major difference in your overall savings.”

If you don’t have access to a workplace 401(k), or you’ve maxed yours out, you can open an individual retirement account (IRA). The two most common types are Traditional and Roth IRAs. With a Traditional IRA, you get a tax break when you make the contributions, and you pay taxes when you withdraw the money in retirement. With a Roth IRA, you put in post-tax dollars but get to withdraw them tax-free.

“A Roth IRA is best for those who are further from retirement because the longer your earnings can grow, the more potential income you can have that will never be taxed,” Gellene said. “If you expect your income to be lower in retirement, contributing to a Traditional IRA with pretax contributions may be better since you will be in a lower tax bracket when you take distributions in retirement.”

Be aware that if your income is very high, you might not be able to qualify for a Roth IRA, he said. But it’s possible to contribute to a Traditional IRA then convert the funds to a Roth IRA later.

You can also invest in an IRA CD, which is when you choose to invest some or all the money in your IRA into a CD rather than traditional stocks, bonds or mutual funds.

There are numerous types of savings accounts available, and the best one for you will depend on your financial goals, and how and when you plan to spend the money.


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