Types of Savings Accounts: A Guide to the Best Accounts for Your Needs

A savings account is the right place to keep cash you don’t need to spend immediately. It’s ideal for medium-term saving because it preserves the dollar value while paying interest.

A savings account is different from a checking account, which is meant for everyday transactions. Savings accounts allow you to save money for specific goals, such as an emergency fund, a down payment for a home, or a large purchase.

While you can make withdrawals from your savings account, your financial institution may limit the number of times you can perform certain transactions per month.

What is a savings account ?

A savings account is a type of bank account that allows you to earn interest on the money you deposit. The amount of interest you earn varies by the type of account and financial institution. Savings accounts can be a safe way to earn interest on your money if you open an account with a reputable institution, such as Patelco, where your money is insured up to $250,000 per member, per account type.

While you have to pay taxes on earnings from interest, savings accounts are an easy way to earn passively. They also offer you more convenience and liquidity, meaning you can easily convert your savings to cash, though you may face penalties for making withdrawals, depending on the account.

Different types of savings accounts

These are the most common types of savings accounts.

1. Regular savings

This is the most basic type of savings account. It pays interest and is typically insured by the NCUA or FDIC. At Patelco, your money is insured by the NCUA up to $250,000 per member, per account type.

2. Money market savings

Money market savings accounts have two important advantage over basic savings accounts: you can write checks against the balance and typically enjoy higher interest rates. Money market accounts make great emergency funds, including our money market accounts. (Note that money market accounts are not the same thing as money market funds, which are an investment account not guaranteed by the FDIC or NCUA.)

3. Interest checking

Although technically a checking account, an interest checking account accomplishes the same thing as a typical savings account: an insured account with growth from interest. Traditional checking accounts don’t pay interest, but interest checking accounts do – albeit at a lower rate than most other savings accounts.

4. Share certificates

Share certificates are offered by credit unions and are great for earning more than a basic savings account offers. The tradeoff? You won’t have easy access to your money for a set amount of time (from three months up to several years). That’s because if you withdraw the money early, you’ll typically have to pay a penalty. Share certificates make good sense when you have a set time you need the cash (in 12 months for example). They’re also a good place to save money you don’t plan to spend in the near future.

If you’re a long way from retirement, a share certificate is probably not the best place for your retirement funds, as they typically grow much slower than other retirement investments. If you’re already retired, however, they’re a savings vehicle you should consider.

Share certificates and certificates of deposit vs. savings

Issued by credit unions, a share certificate is similar to a certificate of deposit (CD) offered by banks. Both are insured up to $250,000 per account holder and are available in terms ranging from three months to five years.

If you think you’ll need withdraw your money in the near future — for an emergency fund or unexpected expenses — choose a savings account. Opt for a share certificate or CD if you’re certain you won’t need access to the cash for several months or years, depending on your financial goals. Since share certificates and CDs offer higher interest rates, you’ll grow your savings faster.

When to choose a money market account vs. CD or share certificate

If you’re looking for easy access to your money, a money market account may be the right choice for you. Most banks and credit unions allow a set number of transactions from a money market account, allowing you to write checks and use a debit card if you need access to your funds.

Meanwhile, a CD (or share certificate, as it’s known at credit unions) might be a better option if you’re planning to set aside money for a substantial purchase in the future: Once you make your initial deposit, your money is untouchable until the end of the term. It’s also one of the safest options: Not only is your deposit insured, your interest rate is also locked in.

5. Health Savings Accounts

Health savings accounts allow you. to make tax-deductible contributions, grow your money tax-free and pay no tax on withdrawal – as long as the funds are used for qualifying medical expenses. To open an HSA, you need to be enrolled in a high-deductible health plan, usually through your employer.

6. College savings (529 plans)

A 529 plan is designed to save up for college expenses like tuition, books, and housing. Although contributions to 529 accounts are not tax-deductible, they grow tax-free and distributions are not taxable if they’re used to pay for college expenses. There’s also a similar plan available called a Coverdell Education Savings Plan, which can be used for grades K-12 and higher education, but is limited to $2,000 of contributions per year.