From the very first days that financial institutions came into existence, savings accounts have been the most reliable option for earning dividends outside of your income. Whereas more tantalizing avenues like stocks and other high-risk investments can pose serious pitfalls, savings accounts represent a less flashy but more secure option. That said, although the dependability and benefits of savings accounts have never been in question, the emergence of online banking has made it difficult to select the optimal account.
Read on for an in-depth look at the 8 types of savings accounts, so that you can decide which one is best for you and your family.
Types of Savings Accounts
Standard Savings Accounts
This is the oldest and most reliable form of a savings account. To get started, all you have to do to get started is deposit a minimal amount of money (in some cases, as low as $1). This deposit will continue to accrue dividends and help you build toward your financial goals.
Having a basic savings account in conjunction with a checking account offers a multitude of benefits, such as:
- Higher dividends – Savings accounts pay higher dividends than checking accounts, which helps you reach your financial goals sooner
- Remain separate from daily transactions – Unlike checking accounts, savings accounts are designed to allow limited withdrawals per month, which means you’re less likely to eat into them
- Customizable – In addition to a traditional savings account, most credit unions offer variations such as youth saving accounts for children 17 and under, as well as savings accounts that require a higher upfront deposit and are geared toward special occasions like holidays, vacations, life milestones and emergencies
There are several factors to consider when choosing a credit union to open your savings account. Look for a credit union that:
- Doesn’t charge monthly fees for maintenance of your savings account.
- Offers competitive dividend rates, so make sure to keep an eye on this, as they do fluctuate.
- Allows you to have multiple accounts to accommodate you and each member of your family.
- Provides checking overdraft protection that doesn’t eat into your savings.
High-Yield Savings Account
A high-yield savings account is essentially a standard savings account on steroids. Whereas a standard savings account typically offers an interest rate of 0.01%, high-yield savings accounts up the ante to anywhere between 1-1.55%.
The only downside of a high-yield savings account is that, because of the higher dividends, your credit union is likelier to charge maintenance fees as well as fees for falling below a certain balance, though not all of them do.
Otherwise, high-yield savings accounts serve as an attractive option if you’re willing to make frequent deposits into the account.
Certificates of Deposit
Like a standard savings account, a certificate of deposit, or “CD,” is an option offered by most credit unions. The terms of CD’s differ in the following ways:
- They usually require a minimum balance of at least $500. Most credit unions will set the minimum at $1,000 or more
- The deposit cannot be withdrawn for a fixed period of time, typically, anywhere from one month to five years, at a fixed dividend rate
- Once the fixed period of time, or “maturity” has elapsed, the customer has the option of either withdrawing the deposit along with the dividends it has accrued, or renewing it for another fixed time period
While you can’t withdraw funds from a CD on demand like you can with a traditional savings account, your long-term commitment is rewarded by yielding higher dividends. The more you deposit into the CD and the longer the term you agree to, the higher the payoff. In some cases, your credit union will sweeten the pot by offering “jumbo certificates.” These are typically CD’s of $100,000 or more that boost dividends significantly.
CD’s aren’t ideal if you’re strapped for cash or have moderate funds at your disposal. But if you have some extra dough to work with, CD’s are a great low-risk, high-reward option.
Money Market Account
If you’re looking for even higher dividends than you would yield with a standard savings account but don’t like the extensive fixed term rates and lack of liquidity that accompany CD’s, you may find money market accounts, or MMA’s, to be the perfect hybrid of the two.
Typically requiring a minimum initial deposit somewhere between $2,500 and $10,000, MMA’s don’t have fixed dividend rates like CD’s. They do, however, present many distinct advantages, such as:
- Accessibility – In addition to being low-risk, MMA’s come with a debit card and checkbook you can use to access the funds. While there’s a limit of six electronic transfers and/or payments per month (and you may be assessed a fine for exceeding that limit), you can execute as many in-person transfers and deposits as you’d like
- “Laddering” – If you keep a substantial amount of money in your MMA, you can use it to “ladder” into multiple CD’s with different terms. That way, you can maintain a combination of CD’s that suit both your short-term and long-term goals
For an MMA with an even greater payoff, you might consider opening a high-yield money market account, which typically starts at $25,000. But before you jump in, keep in mind that, if your balance dips below the $25,000 threshold, your credit union may charge you a fee, albeit a minimal one.
Money Market Fund
Not to be confused with MMA’s, money market funds are mutual fund investments that don’t offer a guaranteed full return on investment, but do have a clear upside:
- They’re still a safe bet based on the fact that they are only utilized as short-term investments on securities with low risk and high liquidity
- Money market funds obtained through credit unions will be insured courtesy of the National Credit Union Agency
- Some money market funds are exempt from federal income tax and state income taxes
Money market funds aren’t a viable long-term option (i.e. for much more than a year), but they do serve as a convenient temporary option for stashing your cash—and potentially yielding a sizable return on it—while you research where you’d like to place your assets next.
US Treasury Bills
Also known as T-bills, treasury bills are backed by the US government itself, which means risk level couldn’t be any lower.
Exempt from both local and state taxes, T-bills are purchased at a discount, and become worth their face value upon maturity, which can be anything from a few days to a year. You can, however, cash out on a T-bill at any time, which some people opt to do en route to reselling on the secondary market.
T-bills are available for a minimum purchase of $100, though they’re usually sold in multiples of $1,000 up to $5 million.
US Treasury Notes and Bonds
Like T-bills, US Treasury notes and bonds (T-notes and T-bonds, respectively) are official government-issued versions of IOU’s. The key difference is that both T-notes and T-bonds have longer maturities attached to them. T-notes are sold at maturities of 1, 3, 5, 7 and 10 years (also for a minimum purchase of $100), while T-bonds have maturities of either 20 or 30 years.
Because of these extended maturities, T-notes and T-bonds, contrary to T-bills, pay out dividends to you every six months.
No, neither T-notes nor T-bonds are going to reel in the whopping returns of a CD or MMA. But like savings accounts, they do provide a steady flow of income on a set schedule.
Individual Retirement Accounts
Regardless of whether retirement is far off in the distance or right on the horizon, it’s never a bad idea to plan for your future by setting up an individual retirement account, more commonly known as an IRA.
There are four categories of IRA’s: individual taxpayers can set up either a traditional or Roth IRA, while independent contractors, freelancers, and small business owners can choose from either a simplified employee pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRA.
Contributions to traditional IRA’s are tax-deductible, which means you can claim your annual contribution as a deduction on your tax return. When you withdraw that money from your account, however, it gets taxed at the normal rate.
You’re allowed to make annual contributions of up to $6,000, or $7,000 if you’re over 50 years old. Once you retire, you’re beholden to Required Minimum Distributions (RMD’s), set amounts that the government makes you withdraw from the account annually.
Roth IRA’s are essentially the inverse of their traditional counterparts. Contributions to Roth IRA’s aren’t tax deductible, but once you retire, you won’t have to worry about the account incurring taxes. They also don’t come with any RMD’s attached.
They do, however, come with a caveat: not everyone is eligible to contribute. If you’re filing as single or head of household, you can’t contribute if you make more than $137,000 annually. If you’re filing as part of a joint married couple, that amount rises to $203,000.
SEP IRA’s function exactly like traditional IRA’s, you can make tax-exempt contributions now, but your future withdrawals will be subject to tax. You’re allowed to contribute an annual limit of up to $56,000 or 25% of your compensation, whichever amounts to less.
If your small business includes employees, you can set up a SEP IRA for them as well and deduct your contributions from your business’s reported income. Your employees, however, can’t make contributions to the account, and any future withdrawals they execute will be taxed by the IRS as income.
SIMPLE IRA’s likewise adhere to the same taxation rules as individual accounts, but differ from SEP IRA’s in that they allow small business employees to contribute to the account and you as the owner are required by law to contribute as well.
Employees can contribute up to $13,000 annually, or $16,000 if they are older than 50.
Opening a Savings Account
In addition to helping you collect dividends over time, each of these types of savings accounts has another important aspect in common: they can all be opened easily with a visit to your nearest credit union. All you need to bring with you is:
- Your license
- Your social security card
- The amount of money you’d like to deposit
Though the purchase of treasuries can be brokered at your credit union fairly painlessly, you may find it more efficient to use TreasuryDirect, the first and only financial services website where you can buy and redeem securities directly from the US Treasury.
As for opening an IRA, your best results are likely to come from opening it with an investment broker as opposed to your credit union.
Diversifying your portfolio with the right type of savings accounts is a matter of understanding your current financial situation and identifying your long-term goals. Some of these options yield bigger returns than others, but at the very minimum, all of them accrue dividends. And at the end of the day, that’s exactly why you want a savings account.
The content provided consists of opinions and ideas and should be used for informational purposes only. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article does not constitute endorsement, control or warranty by Mission Federal Credit Union.
“The 7 Best Places to Put Your Savings” by Jean Folger of Investopedia
“The Differences Between Treasury Bills, Notes and Bonds” by Thomas Kenny of The Balance
“Quick and Easy Guide to High-Yield Savings Accounts” by Satta Sarmah Hightower of Credit Karma