Types of Savings Accounts

The various types of savings accounts can help you earn some extra money while you save. I’m going to explain how the main types of savings accounts work and highlight the features savers generally find most important: safety (risk, if you’re a professional investor), access (liquidity), and earning potential (interest). The accounts I’ll cover are:

• Bank deposit savings accounts.
• Online savings accounts (sometimes called high-yield savings accounts).
• Money market accounts.
• Certificates of deposit.
• Health savings accounts.

Deposit savings accounts are a dependable way to put money aside because they are safe, liquid, and low cost. Deposit accounts are sometimes called transaction accounts or share accounts, usually at credit unions. The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF) secures these accounts up to $250,000, which means even if the bank fails you still get your money back. You can open one with a very small initial deposit.

Deposit accounts are highly liquid – you can add to them or withdraw from them at any time. Federal regulations limit the number of “convenient” withdrawals – aka electronic transfers – to six per month, but that excludes in-person and ATM transactions, which are effectively unlimited.¹ Exceeding the electronic withdrawal limit could trigger a fee and/or conversion to a checking account.

People typically use deposit accounts to put money aside for near-term things or at a moment’s notice, like holiday spending, vacations, house down payments, or emergency funds. Some people even like to open multiple deposit accounts to separate funds for different goals. You can link them to a checking account for automatic transfers, bill payments, or debit card access.

A tradeoff for high stability is low or non-existent interest rates. If maximizing interest income is important to you, compare Annual Percentage Yield (APY) from online banks in addition to traditional banks. In early 2022, APYs on savings accounts ranged from 0.01% to about 0.55%, with the higher rates coming from online high-yield savings accounts.²

The main difference between regular deposit savings accounts and online high-yield savings accounts (HYSAs) is that with HYSAs you get higher returns but lower liquidity. Because these accounts are online, all the transactions are electronic and subject to the six-times-per-month federal regulatory limit. And most electronic transfers take two or three days to complete, so you need more time to get your money than at a physical bank branch, where you can just walk away with it.

With returns approaching 0.55%, though, HYSAs are an option to consider for people who are putting savings away for the long term.

Many people think of money market accounts (MMAs) as a hybrid of deposit and checking accounts because they are relatively safe, liquid, pay interest, and let you write checks.

MMAs are FDIC/NCUSIF insured, which is particularly important since they tend to have larger balances – many require minimum deposits of $2,500 or more. Most MMAs charge fees if balances fall below the required minimum. Mutual fund money market accounts, which sound similar, are not insured. MMAs follow the same six transactions per month regulation (and exclusions) as deposit savings accounts.

Interest earnings are higher with MMAs than many savings accounts because of a higher stated interest rate and daily compounded interest. Those two factors can make a big difference on large balances. For example, in early 2022, interest rates ranged from 0.10% to 0.55%.³

People generally use MMAs to save for infrequent expenses large enough to meet account minimums and earn meaningful interest, like emergency savings, tax payments or current tuition payments.

Certificates of Deposit (CDs) offer safety and, compared to savings accounts, high interest rates. The tradeoff is low liquidity. CDs tie up your funds for a set amount of time. You make one initial deposit and no withdrawals. All CDs offered by banks and credit unions are FDIC/NCUSIF insured. Most CDs share a few common parameters:

• A set maturation period, sometimes called a term or duration, typically from one month to 10 years.
• Penalty charges for early withdrawal.
• Minimum deposit required, although amounts vary significantly from bank to bank.
• CDs automatically roll over at the end of the term, after a grace period during which you can take the money back.
• Fixed interest rate for the entire term, usually with higher rates for longer terms.

CD interest rates tend to max out around 1.3%, as of early 2022.⁴ Interest compounding frequency differs by bank, so looking at the APY is a better way to compare your options because that measure takes compounding into account (for more, read, “The Differences Between APR, APY, and Interest Rates”). CDs that are opened in an IRA account also may have tax advantages.

A common strategy to maximize interest earnings and increase liquidity is to “ladder” CDs, which means spreading a deposit over several CDs with different maturations rates and then reinvesting each into a longer-term CD as it matures. This approach lets you earn the higher rates associated with longer terms and gives you periodic windows to access your money without penalty when each CD matures.⁵

Some CD variations exist, with a common tradeoff for additional options being lower initial interest rates:

• Liquid CDs allow early withdrawal of funds without penalty, which is beneficial if you believe market rates may increase before the CD matures.
• Bump-up CDs include the option to switch to a new, higher-rate CD within the same bank if one becomes available.
• Step-up CDs have built-in interest rate increases at set points.
• Jumbo CDs require high minimum deposits, usually over $100,000, and offer higher initial interest rates.

CDs are often used for saving money for purchases that will be made at a set point in the future, like a home renovation, or a down payment for a car or mortgage. Some people use short-term CDs to earn more interest on their emergency fund.

An HSA is a triple-tax-advantaged savings account, with roots in medical insurance. It also may act as a useful long-term savings account. Since many of the benefits of an HSA are wrapped up in taxes, you’ll want to check with your personal tax advisor for your situation. HSAs are a relatively new type of savings account that you can open if you are covered by a high-deductible health insurance plan.

Here’s how an HSA works:

• You make pre-tax contributions to your HSA.
• Many employers match your contributions (up to limits set by the IRS).
• An administrator invests the funds, and all gains are tax-free.
• You can withdraw these funds tax-free (usually with a debit card) to pay for qualified medical costs.
• Any unused funds stay in the account.
• An HSA moves with you to a new employer.
• After age 65, you can use these funds for anything, but you pay income tax on withdrawals.

Experts often recommend maxing out HSA contributions if you can. In 2022, you can contribute up to $3,650 ($7,300 for families).⁶ You can access the funds for other purposes by paying a 20% penalty to the IRS.⁷

Different types of savings accounts can help you grow your money for the future and earn a small return. Deposit savings accounts, HYSAs, MMAs, CDs, and HSAs are all viable options to select from, depending on how you prioritize the parameters of safety, liquidity, and earnings.