Types of savings accounts

In a nutshell

Savings accounts are designed to be tool for saving money and earning interest. Since the pandemic, savings accounts have become more than a place to park money.

• Some people use savings accounts to save towards a specific goal, while others use them to store money they may need in an emergency.
• There are many different types of savings accounts, depending on what your goals are. Some examples include savings accounts linked to your checking account, high-yield savings accounts and money market accounts.

High-yield savings accounts

A high-yield savings account earns a higher rate of interest than a traditional savings account. In most cases, these accounts are only available through a bank's website instead of a local branch. Many people use these accounts for emergency funds and to save for annual bills.

High-yield savings accounts generally have no monthly fees or minimum balance requirements to open. However, some banks require higher balances in order to earn the best interest rates.

High-yield savings accounts have the same limitations as traditional savings accounts. Many have a maximum of six withdrawals or transfers per month, and you cannot make debit card purchases with a savings account. As of Jan. 19, 2024, high-yield savings accounts ranged from 4.75% APY to 5.35% APY.

Money market accounts

A money market account is a cross between a high-yield savings account and a checking account. It offers a high rate of interest like a savings account, but it also includes the benefit of debit card purchases and, in some cases, the ability to write checks. Because of the ease of access, money market accounts are great for short-term money that you can access easily while earning some interest.

Money market accounts typically have the same monthly transaction limit – six – as savings accounts. Additionally, some banks charge higher monthly service fees or require a larger minimum deposit to open an account. As of Jan. 19, 2024, money market accounts pay an average 5% APY.

Certificates of deposit (CDs)

A certificate of deposit is a bank account that requires you to deposit money for a specified period of time. In exchange for locking up your money, you may receive higher interest rates in a CD over accounts that are more liquid, like a savings account or money market account. CD terms typically range from 30 days to five years, and the longer the term, the higher the rate that you'll receive.

When the CD matures at the end of the term, you can withdraw the money or let it renew at the current rate. The downside of CDs is that the bank charges a penalty if you need your money before the CD matures. At most banks, if your CD term is less than 12 months, you're charged three months of interest. For CD terms of 12 months or greater, the penalty is usually six months of interest.

Because of these penalties, a CD is best for people who won't need the money until it matures. Some investors choose to "ladder" their CDs. This allows them to take advantage of higher rates on longer maturities yet have access to a portion of their money without penalty on a regular basis. As of Jan. 19, 2024, the top 12-month CD rates range from 5% APY to 5.35% APY.

Cash management accounts

A cash management account is a product offered by non-bank financial institutions like Charles Schwab or Fidelity that affords the benefits of checking, savings, and investment accounts in one product. These accounts tend to provide higher interest rates than traditional savings accounts and low fees. Many online-only platforms, like Betterment, also offer cash management accounts.

Although cash management accounts are offered by non-bank institutions, they often partner with a bank to provide the security of FDIC coverage for your deposits. The downside is that most issuers don't have brick-and-mortar locations to speak in person with a representative.

Cash management accounts are good for investors who want the ability to save, invest, and make purchases through one account platform. They don't need to speak with a banker and want higher rates and lower fees compared to a traditional bank account. As of Jan. 2024, top cash management accounts offered APYs ranging from 0.35% to 5.5%.

Specialty savings accounts

In addition to traditional savings accounts, some banks offer specialty accounts that customers use for specific purposes. These accounts often have a limited lifespan and are opened with certain goals in mind. Customers may re-use the accounts over and over again for repeat goals or close the account once they've achieved a certain balance.

Interest rates on these types of accounts vary greatly, with some paying below passbook saving rates (or no interest at all) and others currently paying up to 5% APY or more. Others are investment accounts. Here are a few of the most common specialty savings accounts.

Kids’ savings accounts

Minor children are unable to open accounts for themselves because they cannot enter into a contract until they turn 18 years old. A kids' savings account enables parents to open an account for their minor child to save money and earn interest.

These accounts generally have lower minimum balance requirements to open and low or waived monthly fees. Kids learn the importance of saving for the future and can track the growth of their balance with every deposit.

Custodial savings accounts

A custodial savings account is an account that is opened on behalf of a minor child and managed by an adult. Generally, these accounts are opened by a parent for their child, but not always. Custodial accounts are used to invest money for the child, similar to a brokerage account for an adult.

These accounts have more flexibility and investment choices compared to other child-oriented investment accounts, like a 529 plan or a Coverdell education savings plan.

Student savings accounts

Student savings accounts target young adults who are attending school. These accounts have fewer fees and lower minimum balance requirements compared to traditional bank savings accounts. Banks know that they can generate customer loyalty if they can get customers to open an account as soon as they are eligible. Additionally, the bank can cross-sell them other banking products once they graduate college and start their careers.

Some student savings accounts offer additional incentives that are targeted at students. For example, you might receive an extra bonus or a higher interest rate based on your grades. Once the student graduates, student savings accounts usually convert into the standard version of the account with the normal fees and balance requirements.

Christmas Club savings accounts

Buying presents for your friends and family can be expensive. Some gift-givers find it difficult to save for such a large expense without going into debt for holiday purchases. One way around that is by opening a Christmas Club savings account. These accounts receive regular deposits throughout the year to handle holiday shopping and avoid debt.

Even if your bank doesn't offer a Christmas Club savings account, you can create one yourself at your bank. Simply decide how much you want to spend on presents and divide that total by 12. Then, set up an automatic deposit into that savings account for the monthly amount. The money will earn a bit of interest and be available to make your holiday purchases when you're ready. Most Christmas club accounts don’t pay high interest rates.

Home down payment savings accounts

Whether you're saving up for a 3% or a 20% down payment, keeping such a large sum in cash is a wasted opportunity. You want this money to grow, but you don't want it to be subject to the volatility of the stock market. The best savings account for a home down payment earns a high rate of interest, has low or no fees, and is dedicated to this goal.

Having a separate account is important because you don't want to combine money going toward multiple goals into one account. If all of your money is in one account, it is hard to track each goal's progress. Opening an account with an online bank may be best because that extra step it takes to withdraw the money makes it harder to waste money on things that are less important to you.

Section 529 college savings accounts

Saving for college is a goal for many families of school-aged children. One way to save for college is through a Qualified Tuition Plan (QTP) or Section 529 Plan. These accounts allow money to grow tax-deferred and be withdrawn tax-free as long as the money is used for eligible school expenses. And if you don't use all of the money, the investments in the account will continue to grow. There are no required minimum distributions, and you can transfer the balance to your spouse, children, siblings, and other eligible relatives without penalty.

Eligible expenses go beyond paying for tuition. You can also pay for books and supplies, room and board, computers, software, and internet access. Although originally designed for college, Section 529 Plan rules were updated in 2017 to allow parents to use the money to pay for private elementary and high school tuition.

The benefits of Section 529 Plan accounts are appealing, so many investors want to maximize their contributions to these accounts. While there are no set contribution limits, contributions are considered gifts for federal tax purposes. According to the annual gift tax exclusion, you can contribute up to $18,000 per beneficiary in 2024. If you have enough money, you can front-load five years of gifts by contributing $90,000 all at once in a 529.

These limits are per person, so you can contribute this amount for each of your children. And your spouse can contribute that amount as well. This means that a couple with three children could contribute up to $270,000 this year into 529 accounts for their children.

Traditional and Roth Individual Retirement Accounts (IRAs)

Retirement planning is crucial for investors. Traditional and Roth Individual Retirement Accounts (IRAs) provide tax benefits for investors that reduce taxes. Traditional IRAs provide a tax benefit when you contribute (based on eligibility), the money grows tax-deferred and is taxed when you make retirement withdrawals. Roth IRA contributions are made with after-tax dollars today, but the money is tax-free in retirement.

These retirement plans have annual contribution limits, which may be reduced based on your income and other factors. For 2024, the maximum contribution is $7,000. However, for investors ages 50 and older, you can contribute another $1,000, for a total contribution limit of $8,000.

Health Savings Accounts (HSAs)

Medical expenses can be a budget-buster for many families. However, they can be tough to save for because they are so unpredictable. Health savings accounts (HSAs) are one of the most tax-friendly accounts available to investors. For eligible expenses, contributions are tax-deductible, the money grows tax-deferred, and withdrawals are tax-free.

To have an HSA, you must be enrolled in a high-deductible health insurance plan. The maximum contribution for an individual is $4,150 and $8,300 for families. Investors ages 55 and older may also contribute an extra $1,000 per year.

One of the major advantages of HSAs is that you pay for eligible expenses out of pocket and then get reimbursed later. Some investors choose to let the money grow tax-deferred and then submit eligible receipts years later. This arbitrage opportunity allows investors to benefit from the tax benefits of HSAs on their medical expenses.

The AP Buyline roundup: The best savings accounts depend on your goals

The best type of savings account for you depends on your goals. The first step in picking the right account is figuring out what the money will be used for. Once you know what your goals are, there is at least one type of savings account that can help you achieve the goal.

If you're unsure of where to start, open up a high-yield savings account to start your emergency fund. Ideally, you'll build the balance to fund three-to-six months of expenses in case you lose a job, get sick, or become injured. As you get used to saving money on a regular basis, you can open additional savings accounts to work towards your other goals.