Understanding the Multitude of Deposit Accounts


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There’s a lot to consider when deciding where to put your money. Interest rates, account restrictions, fees, withdrawal penalties, minimum deposit requirements — all these factors can make it tricky to pick a deposit account that best suits your needs. Still, deposit accounts carry less risk than most other investment vehicles and play a role in a balanced financial portfolio, so it’s important to understand how they work and how to pick a good one.



In this guide, we’ll tackle the following:
What is a deposit account?
Types of deposit accounts

Savings accounts
Checking accounts
Money market accounts
Certificates of deposit (CDs)
IRA CDs

How deposit account rates work
How to decide on the right deposit account

Option 1. High-yield savings account
Option 2. CD
Option 3: Money market account

How to invest beyond deposit accounts




What is a deposit account?
A deposit account is an account at a bank or credit union that allows you to safely deposit and withdraw your money. The most common deposit accounts are savings and checking. Deposit accounts fall into two major categories: demand deposits and time deposits. With demand deposit accounts, you can withdraw money at any time without gaining permission from the bank or credit union, up to the full amount of your savings.
Among the demand deposit accounts, you’ll commonly find checking, savings, and money market accounts. Deposits in savings and money market accounts generally earn more interest than those in checking.
Time deposit accounts include certificates of deposit (CDs) and IRA CDs. These are interest-earning accounts that commonly offer better rates than regular savings accounts, but you must keep your money in the account for a set time or pay early-withdrawal penalties. The type of deposit account that works best for you depends on a number of factors, including how you want to access the money and how often.
Security for Deposit Accounts
When deposited into an insured financial institution, your money is protected up to $250,000 per account by the Federal Deposit Insurance Corporation (FDIC), or up to $250,000 per credit union account by the National Credit Union Administration (NCUA). You can find out if the bank you’re considering is insured by the FDIC here .




Types of deposit accounts



Savings accounts
A savings account at a bank or credit union offers you interest on the sum you deposit. Interest may be compounded daily, weekly, monthly, or annually. Wells Fargo Bank reports that the benefits of savings accounts can vary widely based on requirements for a minimum opening deposit, monthly service fees, interest rates, and how the interest is calculated.
Savings accounts don’t offer the convenience of using cash, a credit card, or checks for purchases, but you may be able to withdraw cash at ATMs. It’s important to note that the federal government clearly wants you to use this account for savings: Federal Reserve Board Regulation D limits you to six transactions per month on “certain transfers and withdrawals” from a savings or money market account. If you exceed your transaction limit, the bank may charge you a fee, close your account or convert it to a checking account, so check with your bank about requirements and penalties.


Checking accounts
A checking account through a bank or credit union allows you to easily use your money through a paper check, ACH debit (automatic clearing house, which is an electronic transfer of funds), debit card, or cash by way of a withdrawal at a bank or ATM. You may even find a checking account offering a relatively small amount of annual interest , with some accounts offering upward of 1.50% APY.
Checking accounts may have a variety of fees, which can include monthly maintenance charges, although they may be waived if you maintain a minimum balance or set up a recurring direct deposit. You might be charged for money orders or cashier’s checks, and checking accounts may also limit the amount you can withdraw in a given day or per ATM visit. Writing checks or swiping your debit card for amounts you don’t have can result in costly penalties like overdraft fees, insufficient-funds fees, or returned-check fees.


Money market accounts
A money market account is a high-yield deposit account with an interest rate pegged to rates paid in money markets to banking institutions. Rates on these deposit accounts may or may not be higher than those offered on savings accounts, and as with savings accounts, the rates may fluctuate.
It varies by account, but you may be able to access your funds with an ATM card or checks. Money market accounts are subject to Reg D, just like savings accounts, so you will want to check with your bank about any transaction limits and potential penalties. Minimum deposit requirements for money market accounts may be higher than such requirements for savings accounts, though that’s not always the case.


CDs
A certificate of deposit (CD) offers a way to save money at interest rates that are usually higher than those extended to savings accounts. But this “time deposit” comes at a price: You cannot withdraw money before the CD matures without incurring a penalty.
Penalty rates vary across the industry and by CD term length, but penalties generally amount to losing some or all of the interest you earned on your investment at the point you withdraw. The interest rates are fixed over the term of the CD, which can be a few weeks, months or several years. Caution: The CD may automatically renew upon the maturity of the original deposit, so check with your bank or credit union for details.
Deposits can be insured by participating institutions up to $250,000 via FDIC (for banks) or NCUA (credit unions). Larger principals and longer terms may fetch the more competitive rates, but please, be sure you can go without access to your money for the duration of the CD term, lest the penalties you incur chew up your earnings and defeat the purpose of putting money in a CD in the first place.


IRA CDs
IRA CDs allow you to put money away for long-term savings in a personal retirement account without exposure to common risks associated with more volatile stocks and bonds. You can open an IRA CD at a brokerage or with a bank for investment within a traditional or Roth IRA.
IRA CDs share most characteristics with regular CDs, though IRA CD deposits are subject to annual IRA contribution limits. IRA CDs may renew automatically like traditional CDs, so it’s important to keep track of your CD maturity dates so you can make educated investment decisions when the CD term ends. You may also decide to create a system of CD ladders inside your IRA as a way of moving money from matured, short-term CDs into more profitable IRA CDs with longer terms.
But again, beware of early-withdrawal penalties. Not only are there penalties for withdrawing from the CD before it matures, but if you remove the funds from your IRA entirely, there is an IRS tax penalty of 10 percent on any distribution you take before you reach 59½ years of age. The IRS may waive penalties for funds applied to a first-time home purchase.





How deposit account rates work


You’re not just putting money into a deposit account to keep the funds safe — you want to be rewarded for letting the bank hold your money. Banks and credit unions use your money from deposit accounts to extend loans to other customers. The longer you leave your money and earned interest in the bank, the greater the amount of interest the account will earn in the following period. This is called “compound interest.”
Compound interest
The interest that banks and credit unions pay on deposit accounts is compounded based on the total balance. Depending on the bank and the account, interest compounds on a quarterly, monthly, weekly or daily basis. The more often interest compounds, the faster your balance grows. When looking over prospective deposit accounts, compare the annual percentage yields (APY). The APY advertised by your bank or credit union tells you the amount of interest you’ll earn in one year — the APY factors in the interest rate on the account as well as how often it compounds, so comparing APYs is the best way to compare the earning potential of different accounts.




How to decide on the right deposit account


Chances are excellent that you already have a checking and savings account. So why would you want to open another one or change banks? Compared with the interest you pay out on borrowed money, the APY you’ll commonly find with traditional savings accounts won’t excite you. If you’re looking to make the most of your conservative investments or want to earn as much interest as possible while maintaining regular access to your savings, it may be time to consider a new deposit account.

When to open a high-yield savings account
You may want to look into moving your savings into a high-yield savings account if you can get a better rate than what you’re earning with your current account. When considering a new savings account, pay attention to the following features:

Annual percentage yield (APY)
Minimum deposit to open
Minimum balance requirement
Monthly maintenance fees
Monthly transfer and withdrawal limits
Excess transfer and withdrawal fees
FDIC or NCUA insurance
ATM access



When to open a CD
CDs are a good option if you don’t need access to your money in the short term. But beware of severe penalties for early withdrawals, along with renewal and automatic renewal policies. Once your CD matures, your funds may be automatically reinvested in a new CD of the same term and at the current rate your bank offers on that term. That’s not good if it’s not the best rate available or you need your money soon.
Consider these things when looking at CDs:

Annual percentage yield (APY)
Minimum deposit to open
Term — in particular, how long can you go without having access to this cash?
Early-withdrawal penalties
Investment strategy — are you going to use this CD as part of a laddering strategy?
FDIC or NCUA insurance



When to open a money market account
Money market accounts have many of the same benefits (and restrictions) as high-yield savings accounts. Generally, money market accounts require higher minimum deposits to open than savings accounts, and in exchange for that higher deposit, you may be able to secure a higher APY. If you have a large sum you wish to keep as a liquid asset, a money market account may be your best option. Here are some things to look at when comparing these products:

Annual percentage yield (APY)
Minimum balance requirements
Monthly maintenance fees
Monthly transfer and withdrawal limits
Excess-transfer and withdrawal fees
ATM access
Check-writing abilities
FDIC or NCUA insurance






How to invest beyond deposit accounts


On their own, low-yield, low-risk deposit accounts may be too conservative in building a well-rounded portfolio. A conversation with an independent financial adviser can help you understand how best to get into the market with a diversified portfolio, given your specific goals and current finances.
If you’re holding too much in cash, you should first create a basic budget of monthly expenses. Experts recommend you keep three to six months’ worth of living expenses in a liquid account, like a savings or money market account. Once you’ve saved enough for your emergency fund, you can decide how to invest based on your risk tolerance.
Should you put a specific percentage into deposit accounts and into the stock market? It really depends on your specific needs and your comfort with risk, which is why it’s helpful to talk to a professional planner.
You may want to consider opening financial planning brokerage accounts that can balance and focus all of your investment assets, including cash, CDs, stocks, bonds,g and mutual funds. Whether you’re making your own plans, working with a financial adviser or using a robo-adviser , there are plenty of options for managing and researching investments.


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