Types of bank accounts: What's right for you?
Wednesday, 21 October 2020
Managing your money is an important part of your life.
But in order to make the best possible choices about your money, you need to understand what types of accounts are available, what they are designed to do, and how they can help you reach your financial goals.
Checking accounts are the hub of most people's daily financial activity because they're the easiest and safest way to move money around. How they work is fairly simple: You deposit money into the account and then use checks, debit/ATM cards, online banking, and mobile banking to pay bills, make purchases, and get cash.
Another reason checking accounts are the epicenter of most personal financial activity is today many employers prefer to deposit employee salaries electronically into a checking account instead of writing checks. Direct deposit, as this is called, is easier and more affordable for the employer, and safer and faster for the employee.
There are several common types of checking accounts. First, most financial institutions offer a free or basic checking account with no or low fees and fairly easy-to-meet balance and transaction requirements. Explore our no fee checking account option.
There are also accounts designed for those who keep higher balances in their checking accounts, and these often offer additional perks such as interest or other rewards.
Almost all checking accounts include features like online banking and bill pay, direct deposit, and a debit and/or ATM card. Many also include mobile banking and mobile deposit as well.
Which one is right for you depends on how you use money, and how much you want to pay for the account. Most checking accounts charge a monthly fee, but many offer easy ways to avoid paying monthly fees, such as having direct deposit. Also, in some cases, the more features the account has, the higher the fees. So again, it's a matter of how you use account, what features you want, and how much you want to pay.
There are several different kinds of savings accounts. Most financial institutions offer a basic savings account that pays a relatively low rate of interest but gives the account holder fairly liberal access to their funds. These accounts are an easy way to start saving, and most banks will allow you to set up automatic deposits from your checking account into your savings.
A Money Market account pays a higher rate of interest on your balance, but places additional limits on how frequently you can access your money each month.
A Certificate of Deposit pays a higher rate of interest than a Money Market account, but you cannot access your money for a set period of time — typically 12 to 24 months — without paying a penalty. Interest rates paid on simple savings and Money Market accounts can change while you have your account. But CDs pay you a guaranteed rate for the term of the CD, making them preferable if you have money you know you won't need over a one- to two-year period.
Savings vs. Checking: Which one is right for you?
Ideally, you should have both. A checking account is where you put the money you use every day, while a savings account is where you put money for a rainy day (or some other savings goal).
Many employers offer retirement savings plans to employees. However, if you do not have access to a retirement savings plan — typically a 401(k) — you' can open a retirement account on your own. The most common is an Individual Retirement Account, or IRA.
Depending on which one you choose, IRAs offer tax-deferred or tax-free growth, which makes a big difference when saving long-term. But, again depending on the account, you can't access the funds in your IRA until you are 59 1/2 years old with being penalized.
Several different types of IRAs are available to retirement savers including:
- Traditional IRA - Your money grows on a tax-deferred basis, contributions may be tax deductible, and you can take distributions at age 59 1/2.
- Roth IRA - Your money grows on a tax-free basis but contributions to a Roth IRA are not tax deductible. However, under certain circumstances, you may have the ability to access account funds before age 59 1/2 without penalty.
- Coverdell Education Savings Account (formerly known as an Education IRA) - This investment account allows you to earn interest on a tax-free basis and withdraw the funds for qualifying educational expenses.
Consult with your financial, tax, and accounting advisors to determine whether and which type of an IRA is appropriate for your savings and retirement needs.
If you have money in an employer 401(k) and leave the company, you have 60 days to get it into another retirement account or you can be penalized. Most people roll these funds into IRAs. Again, your financial, tax, and accounting advisors can advise you in regards to rolling over existing retirement funds.
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The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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