Most of us have probably opened up several bank accounts in our lifetime, but few people bother to ask a lot of questions before signing up. While a bank account seems like a simple concept, choosing the right type of bank account can make a big difference. Whether you're looking for long-term savings or greater accessibility, your financial goals determine what type of product you need.
What Type of Account is Right for Me?
There are five basic types of bank accounts: checking, savings, money market, IRA and certificates of deposit (CD). All these accounts are government-insured for up to $250,000. The first question to ask is which account type offers the rates, fees, and level of accessibility that best fit your financial needs.
Checking and Savings: the Basics
The most common kind of deposit account is a checking account. There are both standard options and premium checking accounts, which offer extra features but also require higher minimum balances. Compared to other deposit accounts, checking accounts offer the highest liquidity. That means you can deposit or withdraw money from checking accounts with very few restrictions, making them ideal for paying bills, groceries, and any other frequent spending.
However, most checking accounts earn little interest. For people concerned with growing their money in a safe way, savings accounts offer higher rates at the cost of fewer permitted transactions. Federal law limits savings account holders to six withdrawals per month. Exceeding that limit results in account closure or penalty fees. And few savings accounts come with ATM or debit cards, making them even less accessible than checking accounts.
Money Market, IRAs and CDs
For people interested in diversifying their finances, banks offer other deposit options besides the standard pairing of checking and savings accounts. For instance, money market accounts earn interest based on the current interest rates in the money markets. This can lead to significantly higher rates than those of a savings account. However, money market accounts generally have higher minimum requirements and aren't necessarily flexible enough for short-term needs.
Individual retirement accounts (IRAs) are another long-term savings option. IRAs earn interest through flexible investment options with tax benefits. Until you retire, taking money out of an IRA will incur a significant early withdrawal penalty. IRAs come in two types. Traditional IRA balances are tax-deductible the year the funds are deposited, but you're taxed at retirement on the sum of the account. Conversely, Roth IRAs are taxed before contributions but tax-free upon growth and withdrawal.
Certificates of deposit (CDs) are deposit accounts with both a fixed rate and a fixed term. The rate of return is guaranteed by the bank, and the deposited balance can't be withdrawn before the end of the term without penalty. CDs with longer terms earn higher rates, but they also lock you in and reduce your liquidity for a longer time.
What Does it Mean to Add a Joint Account-holder or a Beneficiary?
When opening a new bank account, some people find it useful to designate a joint account-holder or beneficiary. These roles are powerful tools to help you manage your money alongside or on behalf of people like your partner, your children, or other family members. However, you must start by examining what rights you're granting to joint holders and beneficiaries.
Joint Accounts for Spouses and Survivors
Typically, your joint account-holder has a full and equal right to withdraw or transfer every dollar in your account. Joint account-holders tend to be married couples, but any two individuals are eligible to open a joint account together. Trust is key. Regardless of who deposits what funds, each joint account-holder has the right to do as they wish with the full balance.
Joint accounts are also potentially useful vehicles in cases of inheritance. If one joint account-holder passes away, 100% of the joint account balance will automatically pass to the surviving account-holder unless otherwise stated. This is a helpful method of transferring assets outside of the time-consuming probate process.
Beneficiaries are individuals designated as the recipient of account funds after the passing of any primary and joint account holders. You may change beneficiaries at any time. While a minor can receive account funds as a beneficiary, the bank may require a guardian to control the transfer. Like joint accounts with rights of survivorship, adding a beneficiary to an account is a helpful tool to transfer your assets quickly and easily in the event of your passing.
What Bank Fees and Rules Should You Watch Out For?
Having a bank account is convenient, but that doesn't mean you should be paying to use one. The money you deposit already represents a valuable asset that your bank can use to expand its business. Yet many consumer banks generate staggering amounts of revenue by collecting fees from their account holders. Careful reading of a bank's rules can help you avoid paying to manage your own money.
Minimum Monthly Balance
Many types of bank accounts have minimum balance requirements. Accounts with stronger rates and more features tend to require higher minimum balances. Falling below the minimum balance usually leaves you exposed to additional monthly fees. This makes it important to choose accounts whose minimum requirements fall in line with your typical balance levels.
Banks frequently promote their premium accounts with sign-up bonuses for new customers. By opening an account and keeping a certain amount deposited for several months, newcomers can typically earn a few hundred dollars added to their balance. These bonuses can be useful, but you shouldn't reach for a premium account just to get the corresponding bonus if your usual balance is going to fall below the monthly requirement.
Overdraft (NSF) Fees
Bank accounts also come with a variety of incidental fees and charges. One of the most lucrative revenue generators for retail banks is the non-sufficient funds (NSF) fee, or overdraft fee. An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. Whether or not the overdraft amount is covered is generally at the discretion of your bank, unless you have some agreement otherwise.
If they do choose to cover the overdraft amount, you will be subject to an overdraft fee. Bank overdraft fees vary, but you can expect something in the ballpark of $30. To avoid the potential for your transaction being rejected or the cost of an overdraft fee, you can consider opting into overdraft protection—although this may come with certain costs of its own.
There are generally two ways overdraft protection works. The first is to link another of your deposit account balances to cover overdrafts on the protected account. Most banks charge you around $10 per protective transfer, which is usually less than the standard overdraft fee and avoids the problems of a declined transaction.
The second type of protection is an overdraft line of credit. This is essentially a loan in which the bank agrees to cover your excess withdrawals up to a certain amount, while charging interest on the deficit. Overdraft lines of credit may also cost you an annual fee. Like other loan types, an overdraft line of credit will have a credit limit based on the bank's review of your credit history and other factors.
While overdraft protection can save you from the trouble and embarrassment of declined payments, it's important not to rely too much on these costly alternatives if you want to get the best value out of your banking relationship. A bank account is best when you aren't paying extra just to access your own funds.