Financial institutions make it easier to store money in a secure manner, stay organized, and earn a return from your extra cash. Consumers and small business owners can choose from several types of accounts. Knowing all of your options can help you get the maximum APY and move closer to your long-term financial goals.
What are the Main Types of Bank Accounts Available?
There’s more to banking than checking and savings accounts. These are some of the accounts you can open with a financial institution.
Checking Accounts
Checking accounts are a great way to get started. These accounts help you cover everyday expenses, so you stay on top of your bills. Some of these accounts have decent APYs, but they’re more suited for making payments.
Features of Checking Accounts
- Overdraft protection: This feature minimizes overdraft fees and helps people avoid declined transactions.
- Rewards: Some checking accounts offer high APYs and cashback for every purchase.
- Unlimited transactions: There’s no limit to how often you can withdraw from a checking account.
- Check-writing: Most banks let you write checks against your account’s balance.
- APY: Some checking accounts accrue interest, but you will earn a higher return with other accounts.
- Direct Deposit: Give your checking account number to clients or your employer to ensure funds regularly arrive in the account.
- Automatic transfers: You can move funds from a checking account to another account automatically. You can even decide on the frequency and how much cash you want to move over.
Types of Checking Accounts
- Standard Checking Accounts: This account is basic and doesn’t come with a high APY. You can use it to cover expenses.
- Premium Checking Accounts: These accounts have better perks, such as fewer fees and a high APY. However, you will have to maintain a high minimum balance to get the most out of a premier checking account.
- Student Checking Accounts: These are standard checking accounts that are exclusively for students. They tend to have much fewer fees if any at all.
- Business Checking Accounts: Companies can open these accounts to receive payments from clients and make purchases. This account helps business owners separate their personal assets from their company assets.
Pros and Cons of Checking Accounts
These are the pros and cons to keep in mind when deciding how much money to keep in your checking account.
Pros:
- Unlimited transactions
- Check-writing privileges
- The balance remains stable
- It’s possible to avoid the monthly maintenance fee by fulfilling the minimum balance requirement
Cons:
- Lower APY than other accounts
- Some checking accounts require minimum initial deposits to open
- Fees
Savings Accounts
Savings accounts are also a common type of account for people who are just getting started. Many people keep the money they intend to spend in their checking accounts and put the rest into a savings account.
Features of Savings Accounts
- High APY: Earn more interest on your savings account compared to a traditional checking account.
- Bill Pay: Easily pay any individual or business so you stay on top of your bills.
- Overdraft protection: Savings accounts can allow overdraft transactions to go through, and some of them minimize your overdraft fees.
Types of Savings Accounts
- Regular Savings Accounts: These accounts let you store money and earn a respectable APY.
- High-Interest Savings Accounts: These accounts have higher APYs than average but may require a higher minimum balance to maintain the elevated APY.
- Money Market Accounts: These accounts have variable interest rates that are higher than most accounts, but you may have to fulfill a high minimum monthly balance requirement.
- Certificate of Deposit (CD) Accounts: These accounts offer fixed interest rates for a term duration that you choose. CD terms often range from three months to 10 years. Many CDs charge penalty fees if you want to access some of your cash early, while others have no penalty fees but come with lower rates.
- Children’s Savings Accounts: Start saving for your children with these bank accounts.
Pros and Cons of Savings Accounts
Savings accounts are a staple for your banking experience. These are the pros and cons to keep in mind.
Pros:
- High APYs
- It’s easier to build an emergency fund with a savings account
- It’s convenient and easy to access
Cons:
- Some accounts limit you to six withdrawals per month before charging additional fees
- Some accounts have high minimum balance requirements to earn the maximum APY
- The opportunity cost of keeping your money in a savings account instead of investing it in assets
Specialized Accounts
While checking and savings accounts offer a good starting point, you can expand your horizons with these specialized financial accounts.
Retirement Accounts
- Traditional Individual Retirement Accounts (IRAs): Any individual can get this retirement account and contribute up to the annual limit. The IRS periodically adjusts this limit. A traditional IRA is available for any individual, regardless of their income. You get to defer taxes until you withdraw funds from this account.
- Roth IRAs: You won’t get a tax break when you contribute to this account, but you don’t have to pay taxes on any of the capital gains or dividends. Roth IRAs have the same maximum contribution as traditional IRAs. A key difference is that high-earners cannot contribute directly to a Roth IRA. The IRS adjusts its income limit for contributors. If you are ineligible to contribute directly to a Roth IRA, you can still use the backdoor method to invest in a Roth IRA.
- 401(k) Plans: These employer-sponsored plans have higher annual contribution limits. While most of these plans are traditional, some employers also offer Roth 401(k) plans.
- SEP IRAs: Business owners can set up these accounts to maximize their retirement contributions instead of relying on a traditional or Roth IRA.
Education Savings Accounts
- 529 College Savings Plans: A state or a state agency sponsors these accounts. The tax-advantaged account can help you save money for your child’s education. You can make withdrawals when your child is in K-12, college, an apprenticeship program, or in another qualifying type of education.
- Coverdell Education Savings Accounts (ESAs): These are additional accounts you can use to save money for your child’s education without paying taxes. However, it’s limited to lower-income households.
Health Savings Accounts (HSAs)
A health savings account allows you to defer taxes and use the funds to qualify for health expenses. Starting at 65, you can withdraw funds for non-qualifying medical expenses without paying a penalty fee. You’ll still have to pay taxes on withdrawals.
Brokerage Accounts
These accounts let you invest in various assets, such as stocks and bonds. You won’t enjoy any tax advantages but can access your money at any time without incurring any penalty fees.
Joint vs. Individual Accounts
Consumers can choose from several types of bank accounts, but it’s also important to consider if you want to set up a joint or individual account. Here’s what you should know when making the decision.
Features of Joint Accounts
Joint accounts allow two or more individuals to assess the account. They can make deposits and withdrawals without seeking the other person’s approval. Joint accounts are typically common for spouses. They are less common for unmarried couples but are still present in some of those scenarios.
Features of Individual Accounts
An individual account is only available to the sole account holder. Like joint bank accounts, these accounts have the same typical features you can expect from a mobile banking experience.
Pros and Cons of Joint Accounts
These are some of the pros and cons to keep in mind before creating a joint account.
Pros:
- It’s easier for partners to manage their finances
- You can save time with this account
- Partners can review their financial activity together
Cons:
- It’s less private
- A partner can use the other person’s money irresponsibly
- Individual accounts may be better due to each partner having different financial goals
Pros and Cons of Individual Accounts
While an individual account may seem like an easy choice, it has some weaknesses that you should know about before committing to this account exclusively.
Pros:
- More autonomy over your financial decisions
- Distinguish your money from your partner’s money
- The ability to move funds to multiple accounts based on their APYs, your goals, and other reasons
Cons:
- It’s more difficult for each partner to monitor the other’s financial activity
- Less accountability
- It can be more complicated to decide who pays for what
Trust Accounts
Trust accounts give a third party permission to manage assets for a beneficiary. These are the two types of trust accounts.
Revocable Trust Accounts
A revocable trust can be changed under certain circumstances. It gives the trustee some flexibility to make decisions based on their judgment.
Irrevocable Trust Accounts
Irrevocable trusts cannot be changed. The trustee must implement the trust based on the outlined terms and conditions.
Pros and Cons of Trust Accounts
Pros:
- You know your money will go to your beneficiaries
- You can handpick a reliable trustee
- Set terms and conditions for accessing assets
Cons:
- Irrevocable trusts can be problematic if you want to make changes
- The trustee isn’t always reliable
- A revocable trust also creates issues if it gets revised against your liking
Custodial and Minor Accounts
Custodial and minor accounts allow parents to set up accounts for their children. Legal control of these accounts shifts to the child when they are between 18-25 years old. The age at which the transfer takes place depends on the state. These are the two top custodial accounts.
Uniform Gifts to Minors Act (UGMA) Accounts
These taxable accounts allow parents to invest in stocks, bonds, mutual funds, and ETFs for their children. There is no contribution limit for a UGMA.
Uniform Transfers to Minors Act (UTMA) Accounts
UTMA accounts have the same rules as UGMA accounts, but with a key difference. While UGMA accounts are limited to stocks, bonds, mutual funds, and ETFs, you can also invest physical assets in a UTMA. A UTMA can include real estate, precious metals, jewelry, and other physical assets.
Features and Benefits
These are some of the perks of UGMA and UTMA accounts.
- No contribution limit
- Investors can choose from a wide range of assets
- Give your child a head start financially
Conclusion: Picking the Right Bank Account for You
Choosing the right combination of bank accounts can move you closer to your financial goals while minimizing your fees. It’s a good idea to consider your long-term objectives and current financial situation when deciding which accounts you need. Comparing bank accounts will lead to the most optimal rates, terms, and perks.
