Types of Bank Accounts

Photo illustration to accompany article on choosing a bank account Grant Crowder and Getty Images

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When setting financial goals — whether it’s building an emergency fund or saving for an upcoming root canal — it’s important to know where to put those savings. 

Putting money into the wrong account may seem like a small blunder, but it can cause headaches down the line if, say, you need to pay for the root canal and you realize the funds are tied up in a three-year CD. These distinctions set you up for success down the line, so we matched the most common types of bank accounts with different financial and life goals.

Interest rates fell sharply during 2020, due to the Federal Reserve freezing interest rates during the COVID-19 pandemic. While rates may not be as competitive now, there are still ways to capture earnings on your savings while maintaining the liquidity necessary in times of uncertainty. It’s important to weigh the relative benefits of any account with flexibility, as we remain in a period of economic uncertainty. And remember that you can use different types of accounts for different purposes, like a savings account for your emergency fund and a money market account for your future home down payment. (Retirement savings require a separate investing strategy.)

Here are the four most common banking accounts, and the best way to use each.

Checking Account

Intended to be your primary bank account, a checking account handles purchases, checks, recurring bills, transfers, and other types of transactions. This type of account comes with a debit card and allows for ATM withdrawals, checks, and transfers in to and out of the account — but check the details, because these services can come with fees. One downside of a checking account is that the interest rate is usually zero or very low, and there may be monthly fees if you don’t meet certain requirements.

Who is it for? All banking customers at minimum need a checking account. It’s the only account intended for the high activity of daily living and spending, providing easy access to your money.

Best for: 

  • Purchases
  • Recurring bills
  • Unlimited transfers and checks
  • ATM withdrawals

Not recommended for: 

  • Savings
  • Earning interest

Keep in mind: “Are there required minimum balances to maintain, and if so, can you realistically and reliably maintain those balances without incurring fees?” — Tracy East, outreach and communications director for Consumer Education Services Inc., a financial counseling nonprofit in Raleigh, North Carolina.

Savings Account

Savings accounts offer you a rate of return (APY) in exchange for keeping money with the bank. Best for planned expenses and emergency funds, they allow you to earn a small return on your money — interest rates at online banks are typically between 1% and 2% — while avoiding the volatility of the stock market. Typically, you are limited to six transactions (withdrawals or transfers) per month, but with the COVID-19 pandemic, the Federal Reserve has temporarily waived that rule. 

Who is it for? Anyone in a position to save money should have a savings account, if only to keep emergency savings separate from their daily checking account. If you have more than three months of expenses in a checking account, it’s best to move the excess to a savings account. 

Best for: 

  • Emergency fund
  • Vacation funds
  • Planned tax payments
  • House down payment

Not recommended for: 

  • Frequent transfers
  • The bulk of your retirement savings
  • Automatic bill payments
  • Check writing
  • Investing

Keep in mind: “You can have multiple accounts — one for vacation, one for your next vehicle — and not be confused by what’s for your emergency fund.” — Todd Christensen, AFCPE-accredited financial counselor at Money Fit by DRS Inc., a nonprofit that offers debt-relief programs.

Money Market Account

Money market accounts are a type of savings account offering some of the flexibility of a checking account. MMAs typically come with interest rates higher or commensurate with savings accounts, but also offer a debit card and check-writing privileges. Usually, money market accounts are limited to the same “six convenient withdrawals” rule as savings accounts, but that rule is now temporarily suspended because of COVID-19. They often require higher minimum amounts ($2,500) to open.

Who is it for? People who are saving larger amounts of money they don’t want tied up in the stock market or a CD.

Best for: 

  • Emergency fund
  • College tuition
  • Vacations
  • Planned tax payments
  • House down payment
  • Debit card purchases

Not recommended for: 

  • Frequent transfers
  • The bulk of your retirement savings
  • Automatic bill payments
  • Check writing
  • Investing
  • Savings of less than $2,500 

Keep in mind: Interest rates are low right now, so the interest rate on a money market account may not be better than a savings account at this time. 

Certificate of Deposit

Certificates of deposit (CDs) offer relatively high interest rates in return for locking up cash for a fixed period of time (known as a term length, which can range from one month to 10 years). The longer the term length, the higher the APY. CDs tend to be the least liquid of bank accounts; early withdrawals will trigger a penalty, which can eat at interest earned and even into your principal amount. 

When saving with CDs, it’s often recommended that you divide your purchase into multiple CDs, so you can get a variety of rates and levels of liquidity. 

Who is it for? Anyone who has enough in liquid savings that they can afford to lock up a portion of it in exchange for higher rates

Best for (keeping in mind term length): 

  • Planned expenses timed for after the term length ends
  • College tuition
  • Future vacations
  • Planned tax payments
  • House down payment

Not recommended for: 

  • Emergency fund
  • Investing
  • Cash you need on short notice

Keep in mind: “CDs make your money inaccessible for a set period of time. It eliminates the temptation to dip into that money and [offers] a hands-off approach if you’re really wanting to save and invest your money.” — Tracy East, outreach and communications director for Consumer Education Services Inc.

IRAs

Investment retirement accounts, or IRAs, are designed specifically to help you save for retirement. There are two main types of IRAs: traditional IRAs and Roth IRAs. Both have the benefit of earning compound interest and can be opened at most financial institutions. Contributions to a traditional IRA are tax-deferred, meaning they’ll reduce your taxable income upfront, but you’ll pay taxes when you withdraw your money. Roth IRAs work in the opposite way. You fund a Roth IRA with after-tax income, but you won’t pay taxes upon withdrawal. 

For 2021, the maximum total contributions you can make to all your IRA accounts is $6,000 if you’re under 50 and $7,000 if you’re age 50 or older. Roth IRAs also have specific contribution limits based on income. 

Who is it for? Anyone who wants to save for retirement. If you’re currently in a lower income tax bracket (for example, young professionals just starting out), a Roth IRA might be a better option because your tax rate will likely get higher as you earn more money throughout your career. 

Best for: 

  • Retirement savings
  • College tuition (with certain conditions)
  • House down payment (with certain conditions)

Not recommended for:

  • Emergency funds
  • Vacation funds 
  • Funds you need in the near future
  • Frequent transfers

Keep in mind: You may incur an early withdrawal penalty (barring certain exceptions) if you withdraw your funds before age 59 ½, so this account should be dedicated to retirement-specific savings.

Brokerage Accounts

A brokerage account is a cross between a traditional checking or savings account and a securities trading account. A brokerage account has all the functions of a bank account — such as deposits, withdrawals, and debit cards — and also lets you use the funds to buy investment securities like stocks, bonds, and mutual funds. If you plan to invest heavily in the securities market, a brokerage account can streamline the process. However, brokerage accounts don’t offer tax benefits like IRAs, and unlike savings accounts or CDs, returns on investments in the securities market aren’t guaranteed.

Who is it for? People who want streamlined access to the securities market directly through their bank account. 

Best for: 

  • Investing
  • Securities trading

Not recommended for:

  • Emergency funds
  • Additional banking services such as home loans, credit cards, or car loans
  • People who don’t have a lot of discretionary assets

Keep in mind: There’s always a chance that investment securities may lose value, so don’t use a brokerage account for emergency funds. Also, be aware of any commissions or fees that your brokerage account charges.