Understanding the different types of savings accounts and how they work
A savings account, also called a “deposit account,” is available from credit unions, banks, and online financial institutions. Savings accounts typically pay interest on the monthly balance with tiered levels of interest.
There are many different types of savings accounts, and each serves a different financial purpose. The best type of savings account is the one that helps you meet your personal financial goals.
At Credit Union of Southern California (CU SoCal), we make opening a savings account easy!
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is a savings account and how does it work?
Savings accounts are typically used for saving money, rather than paying debts. Savings accounts were created to help people keep the money they use to pay bills separate from the money they save. Savings accounts are worth having, especially if you can get an account that pays interest on the account balance.
Savings accounts can help you build your wealth and save for retirement.
It’s easy to open a savings account, especially if you already have a checking account at a financial institution. As we’ll discuss later in this article, there are different types of savings accounts, and some pay more interest than others. The type of account you choose should be based on your income, age, projected retirement age, monthly debts, and your financial goals.
As you’re researching savings account options, be aware that there may be a minimum balance required in order to receive the higher tiered interest rates.
Types of savings accounts
Today’s savings account options give consumers great choices for growing their money, whether you’re just starting your financial journey or entering retirement. Here are some of the most common types of savings accounts.
Regular/traditional savings. Regular savings accounts do not come with checks. If you need an account from which to pay bills, a
checking account can provide you with check-writing and bill-pay resources.
Interest-bearing savings. Also known as high-yield savings, these accounts require a higher minimum balance and pay interest. The more money you keep in savings, the more interest you’ll earn.
Student savings. These accounts help young people save before and during college. Student accounts typically have lower monthly balance requirements and low or no fees.
Share certificates/certificates of deposit (CD). A certificate of deposit is a type of savings account that holds a fixed amount of money for a fixed period (such as six months, one year, or five years), and in exchange, the financial institution pays you interest. When the term comes to an end and you cash in your certificate, you receive the money you originally invested plus the interest. At credit unions, including CU SoCal, certificates of deposit are simply known as “
certificates.”
Money market. A
money market account is a type of savings account offered by credit unions and banks. Money market accounts are sometimes called money market deposit accounts or money market savings accounts. Money market accounts are interest-bearing accounts, meaning that interest is paid on the account balance. Most money market accounts come with a debit card and checks, to make financial transactions easier and more convenient.
Health savings account (HSA). An HSA a type of savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, as long as you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more.
Traditional IRA and Roth IRA. These are both types of retirement savings accounts, specifically for depositing money that is to be saved for retirement.
Traditional IRA. The tax benefit of a traditional IRA is related to the amount of the contribution. This why many people contribute to an IRA at the end of a tax year, so as to reduce their taxable income. Because the IRA contributions come with a tax benefit at the time of deposit, income tax must be paid when the money is withdrawn in retirement. Anyone can open a traditional IRA, regardless of their income.
Roth IRA.
Roth IRAs are funded with after-tax dollars (meaning earnings that have already been taxed). As a result, your account will grow tax-free, and you will not need to pay tax in retirement when you withdraw the money. Roth IRA holders can make tax-free and penalty-free withdrawals after age 59 and one-half.
401(k). A 401(k) is only offered through an employer. A 401(k) allows employees to contribute a portion of their wages to individual accounts. Employees make elective pre-tax contributions. There are no income limitations to participate in an employer’s 401(k). Because 401(k) contributions are made with earnings that have not yet been taxed, tax will need to be paid upon retirement when the funds are withdrawn from the account.
Seasonal savers. This category includes holiday accounts and summer saver accounts. These types of accounts help people who want to set aside extra cash for holiday shopping or summer vacation. At CU SoCal,
Seasonal Saver accounts pay a higher dividends than regular savings and don’t charge a monthly fee.
Reasons to use a savings account
There are several benefits to having a savings account:
- Interest earning. Almost all types of savings account pay interest on the account balance. This helps you grow your money, whether you’re saving for a vacation or saving for retirement.
- Emergency fund. Financial experts recommend that individuals keep a savings balance to cover at least six months of living expenses, so if you were to lose your job or become unable to work, you can cover payments for rent/mortgage, loan payments, credit cards, and other living expenses.
- Insurance. All savings accounts are insured for up to $250,000 per account. The National Credit Union Administration (NCUA) is the federal insurer of credit unions and provides consumers with the guaranteed coverage. Similarly, the Federal Deposit Insurance Corporation (FDIC) insures deposits made at banks.
How much to keep in savings
Most financial experts recommend having between three months and six months of living expenses in a savings account. This should include enough money to pay your rent or mortgage, buy food, pay your monthly debts including phone, household utility bills, loans, credit cards, auto and home insurance, and other necessities.
Savings vs. checking accounts: what's the difference?
A checking account is traditionally used to deposit checks and cash, write checks, and make payments. Checking accounts come with a
debit card that gives you access to cash on the go—at ATMs and for making in-store purchases. Look for rewards debit cards that earn cash-back and other perks.
A savings account is typically for depositing incoming funds to be saved. For some people, the best type of savings account may be the one that offers the highest interest rate so you can grow over time as you save. For others, the best type of savings account may be the one that provides access to funds without restrictions or penalty fees.
Most people have both types of accounts to streamline their outgoing funds, incoming funds, and the funds they’re saving for a special purpose.
Which savings account is right for me?
Everyone should have a traditional savings account. If other types of accounts interest you, it’s important to do your research and speak to a representative at your credit union or bank about interest rates and account requirements.
It’s also a good idea to speak to your tax accountant, financial planner, or other finance professional to determine which savings account options are the best types of savings accounts for you.
How many savings accounts can I have?
There are no limits to how many savings accounts you can have. In fact, there are benefits to having more than one savings account as well as multiple types of savings accounts.
With so many savings account options to choose from, consider opening several accounts: one for everyday savings, one for saving for the holidays, and one or more for retirement.
The number and type of savings accounts you open should be based on your financial goals, and you’ll find that each type of account can help you meet a different goal, such as short-term savings and long-term savings.
For example, if you’re saving for retirement, a blended approach with different tax benefits can help with reaching financial goals when you’re no longer working.
What do I need to open a savings account?
You can open different types of savings accounts on your own or jointly with another person. To open a savings account, you’ll need:
1. Established Membership with a checking account
2. Provide Social Security Numbers for all account holders
3. Provide a Driver's License or State-Issued ID for all account holders
4. Fund your account using your debit card, credit card, or checking account number.
Other information you’ll need to provide including: proof of address and date of birth, phone number and email for contact.
At CU SoCal, we make it easy to open different types of savings accounts. After you
establish Membership, you can
open your account online or through one of our
branch locations. (Although it is not required, you may
schedule an appointment at a branch location of your choice to eliminate wait time.)
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
Get Started on Your Saving Account Today!