Understanding the Different Types of Bank Accounts
If you’re in the market for a bank account, you likely see a lot of different terms, such as checking, savings, checking and savings, money market, and more.
Having a bank account (or two or a few) typically provides the foundation of your daily financial life, so it’s important to choose wisely. Bank accounts can allow you to safely store your money; track your earnings, spending, and saving; and potentially earn some interest as well. In these ways, bank accounts can help you meet your goals, from socking away the down payment for a house to retiring early.
For instance, in SoFi’s April 2024 Banking Survey of 500 U.S. adults, 88% of people said they have a checking account and 71% have a savings account.
Different accounts can serve different purposes and have their own pros and cons. This guide will help you understand which account or mix of accounts can be best for your unique financial situation and aspirations.
Key Points
• Different types of bank accounts can help you meet different goals, from saving in the shorter-term for a vacation to saving over the years for retirement.
• Checking accounts are designed for daily transactions and short-term financial needs, while savings accounts can be better for longer-term savings goals, given their higher interest rates.
• Money market accounts and CDs typically offer higher interest rates, but come with certain restrictions — money market accounts may limit transactions, for example, while CDs typically require funds to remain in the account for a period of time.
• Retirement accounts like IRAs and 401(k)s are tax-advantaged and designed to help individuals grow their savings, but come with restrictions, such as penalties for early withdrawals.
• Brokerage accounts allow people to trade securities: While these come with higher risk and potential fees, they have the potential to provide higher returns.
7 Types of Bank Accounts Explained
Here’s a rundown of the different types of banking accounts, how they’re different, and how they could make achieving financial goals simpler.
1. Checking Account
Checking accounts can be the hub of your financial life, as money flows in and out as you earn and spend (or deposit and withdraw funds). Some points to consider:
• It doesn’t take much time to open a checking account (often less than a half hour), and they are available through traditional banks, credit unions, and online financial institutions.
• Accounts are typically insured by the Federal Deposit Insurance Corporate (FDIC) or National Credit Union Administration (NCUA) for $250,000 per account holder, per ownership category, per insured institution.
• Some checking accounts may charge fees, while others allow opening checking accounts for free but may have some restrictions. It may be possible to have fees waived on a checking account by meeting certain minimum account balances or setting up direct deposits from your employer.
• Checking accounts got their name from one of their prominent features — writing checks. While writing checks may be less common these days, a debit card typically enables you to tap and swipe as you spend.
• Many checking accounts offer no interest, though some do pay an interest rate, usually well under the rate of inflation. This means that if a person chooses to park all their money in this account, their money wouldn’t keep pace with inflation and would end up losing value year over year. That’s why, while many Americans have a checking account, it’s typically not their only bank account.
2. Savings Account
Another type of deposit account is a savings account. Checking and savings accounts often form the foundation of a person’s banking life.
• Savings accounts generally earn more interest than a checking account, and you are likely to find some of the best rates at online banks. You may see the terms “high-yield” or “high-interest” used to describe these. According to SoFi’s survey, 23% of respondents have a high-yield savings account.
• In general, it’s not recommended to use a savings account for day-to-day spending. Instead, it’s better suited for short-term savings goals, so that you can earn interest as you save.
How People Use Their Savings Accounts
To save for emergencies | 77% |
To save for a specific goal such as a vacation | 52% |
To earn interest | 48% |
Source: SoFi’s April 2024 Banking Survey of 500 U.S. adults
• As with checking, the usual age to open a bank account on your own is 18.
• Unlike a checking account, the cash stored in savings accounts is typically less accessible — that’s why they call it a saving not a spending account. A savings account may not have an ATM or debit card and it is most likely not possible to write a check from it either.
• Some savings accounts may require a minimum balance. If an account holder goes below the minimum required balance, some banks will charge a fee.
• Savings accounts may also have limits on how many withdrawals can be made from the account each month. Regulation D may limit the number of withdrawals from your savings account that can be made each month. In the past, Regulation D limited the number of withdrawals from savings accounts to six per month. This limitation was suspended indefinitely in 2022, though financial institutions may still assess fees for more than a certain number of outgoing transactions.
• Additionally, some banks may charge maintenance fees for keeping a savings account open. Fees and policies will vary bank to bank, so it can be beneficial to account holders to shop around to different banks instead of settling with the first one they find.
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3. Checking and Savings Account
Another bank account type to consider: a checking and savings account, which is a hybrid that allows account holders to save and spend from one account. Often offered by online banks, these accounts may pay competitive interest rates, be more convenient, and have tech tools that can make tracking spending and saving very simple.
Another way to go is to open both a checking and a savings account at a single financial institution or different banks. While there’s no one “perfect” bank account, people can mix and match, some people may find that opening a number of bank accounts can help them meet both their daily needs and may be suitable for some short to mid-term goals. In fact, 31% of respondents in SoFi’s survey said they had two checking or savings accounts, and 20% had three accounts or more. Thirty-seven percent had just one checking or savings account.
Some factors to consider are the annual percentage yield (APY) or other perks available from the account.
4. Certificate of Deposit
A CD, or certificate of deposit, is sort of like a savings account, but more hands-off. Both types of accounts are meant for saving, but while an account holder can withdraw money from a savings account within the limits set by Regulation D, outlined above, money deposited in a CD is considered untouchable for a predetermined amount of time.
• Length of CDs can range from a few months to several years or longer. The benefit of a longer CD term is generally a higher interest rate — that is, unless banks expect the federal funds rate to drop. In that case, a shorter-term CD may pay more than a longer-term CD. According to the FDIC , the national deposit rate cap for a three-month CD was 1.53% and for a 60-month CD is 1.43% as of mid-July 2024. You may find higher rates when shopping around.
• But with that boost in interest rates comes a few caveats. In addition to its “no touch” policy (no early withdrawal) some CDs also have a minimum deposit, typically starting at $500 and up.
• There is the option of no-penalty/early withdrawal CDs. However, be wary when signing up for these, as they often include specifics on how and when an account holder can withdraw early without fees and penalties.They may not earn more interest on your money either when compared with standard savings accounts.
• CDs are usually insured and considered a safe place to store funds.
• Another alternative is CD-laddering. That means buying CDs of varying intervals, so access to savings will be staggered as CDs expire.
5. Money Market Account
A money market account is another type of FDIC-insured account.
• Money market accounts generally have a higher interest rate than a traditional savings account, but may have more restrictions.
• These accounts are typically insured.
• Additionally, taking funds out of a money market account can be relatively easy — many come with checks or the ability to execute online electronic transfers.
• Money market accounts may also be restricted as under previous Regulation D guidelines and have monthly limits on transactions. That means withdrawals and transfers could be limited, making it not a good fit for day-to-day transactions.
• Like savings accounts, money market accounts may have balance minimums. In some cases, these minimums are higher than a savings account. If an account holder doesn’t maintain the balance minimum, it’s likely they’ll be charged a monthly fee.
• Money market accounts might be the right choice for people who want high-yield savings, but don’t need to access the capital too often and can meet the deposit minimums.
6. Brokerage Accounts
A brokerage account is a type of investment account that allows account holders to trade securities.
• It’s important to note that while the return on these accounts could be positive, there is risk involved. Your money is not insured, and the value of your account could dip.
• Depending on the service level of the brokerage, a brokerage account can come with fees. Typically, the more “full-service” firm, the more the firm does the work for the customer, the more fees. On the other hand, automated investing and DIY brokerages may have fewer fees associated with them.
• To open a brokerage account, a person needs cash and an idea of what they’d like to purchase. Some accounts do not have a minimum deposit amount but others require a minimum deposit which may range depending on the account type.
• In order to withdraw funds from a brokerage account, securities need to be sold first. After settlement, the money can be withdrawn from the account.
• Withdrawn investments may be taxable, and investing is often thought of as a long-term savings strategy. A brokerage account is less liquid than a savings, checking, or money market account.
7. Retirement Accounts
Retirement accounts, like IRAs, 401(k)s, and SEPs, are designed to help individuals save for retirement. Deciding what kind of retirement account to open will depend on a number of factors:
• Employer benefits. Some employers offer a 401(k) and may have a 401(k) matching program or other perks with their retirement plans. Taking advantage of those benefits can be worthwhile, especially up to the employer match.
• Target retirement date. Working backwards using a retirement calculator, people can determine just how much they need to save each month to retire on time. From there, certain retirement plans might make more sense than others.
Selecting a retirement plan is a personal decision that depends on factors like their personal goals, the target date for retirement, risk tolerance, and more.
For questions, it can be helpful to consult with a qualified financial professional. With retirement accounts, the money contributed is locked-in until retirement. Withdrawing early can result in fees and penalties that can cut into savings.
Finding Accounts That Work for You
Since different types of accounts have different purposes, benefits, and uses, it is likely that individuals will have a few kinds of accounts to meet their needs. You might keep all or most of your accounts at one institution, or you might open them at various banks and/or brokerage firms.
Each financial institution is likely to have its own policies in place so it can be helpful to review the options available with a few different institutions as you build your financial portfolio. If you have questions, consider consulting with a financial professional who can provide personalized financial advice.
Recommended: Requirements to Open a Bank Account
Looking for Something Different
When it comes to personal finance, different account types can serve different purposes. Checking accounts make it possible to easily withdraw and deposit money while accounts like 401(k) or IRAs are designed for longer-term goals, like investing toward retirement. People will generally have a mix of these accounts. A checking and savings account can offer account holders the ability to easily deposit and withdraw money into their account, while also earning a competitive interest rate.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What are the most common types of bank accounts?
There are a variety of common bank account types, depending on your financial needs and goals. These include checking, savings, checking and savings, and certificate of deposit (CD) accounts, among others.
What are the two most common types of bank accounts?
For many people, the two most common types of bank accounts are checking and savings. Typically, a checking account is for daily use, meaning depositing money and spending it. A savings account is geared towards savings and typically pays interest.
What is the best kind of bank account to open?
Of the different types of bank accounts, the best kind to open will depend on your particular needs. Many people find a checking account to be the hub of their financial life, allowing them to deposit and then spend funds. A savings account can be a good place to stash money for a while and earn interest. (There are other types to consider as well.) You will find variations in interest, minimum deposit and balance, fees, and other features depending on the financial institution.
Photo credit: iStock/hemul75
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SoFi members with direct deposit activity can earn 4.30% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.30% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.30% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/8/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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