6 Common Types of Bank Accounts

Updated Dec 6, 2022.
Common Types of Bank Accounts

Many people know what checking and savings accounts are, but are not aware of other types of bank accounts offered by financial institutions.

Each bank account type has its unique functions and benefits for users. If you want to earn a good interest rate on your deposit, a checking account is not the go-to choice. Also, if you want to make withdrawals more often and easily, a savings account is not the best option.

There are six common types of bank accounts. They include a Checking Account, Savings Account, Money Market Account (MMA), Certificate of Deposit (CD), Individual Retirement Agreement (IRA), and Brokerage Account. 

Note that each bank account type has its own rules of operation and requires some sort of fee. It is financially intelligent to put your funds into the best bank account type for your projected financial goals. Selecting the right bank account type helps you minimize fees charged and maximize returns from your bank.

In this article, you will learn about the six common bank account types, how to use them, what they are good for and their drawbacks, and how to choose them. 

Let's get started.

1. Checking Account

A checking account is a deposit account that simply allows the account owner to make deposits and withdrawals. They are very liquid types of bank accounts that enable the owner to make unlimited daily deposits and withdrawals. You can make more deposits and withdrawals compared to savings or investment accounts with a checking account.

Owners of checking accounts deposit money either directly at banks, via ATMs, or through other electronic transfer mediums. Money is also withdrawn directly from banks, through ATMs, by writing checks, using electronic debit or credit cards paired with their accounts, or any other electronic transfer mediums.

However, the high level of liquidity you enjoy through checking accounts comes at a price. Checking accounts do not offer holders much interest and, sometimes, none. Interest on money deposited is kept very low when compared to other bank account types but, usually, there are no minimum balance requirements. 

You have to keep track of your checking account fees. Fees are charged for overdrafts, writing too many checks, and, sometimes, getting your account balance to drop below the required minimum set by the bank or financial institution. 

Checking Account Balances by Age
Source: ValuePenguin

Checking Account is Good for…

Generally, checking accounts offer you more advantages than disadvantages. Some of the pros of using a checking account include:

Easy Access To Your Money 

Owning a checking account means there are no limits on the frequency at which you can deposit or take money out of your bank.  

Compared to savings accounts which, in some cases, may offer users as little as 6 permitted withdrawal transactions per month, checking accounts offer you unlimited withdrawals. You can withdraw at any time and through any permitted medium. If you want to withdraw all the money in the account, a checking account permits you to do so.

You May Earn Some Interest 

Some checking accounts allow you to earn interest on the money you store in it. What this means is that no matter how little or slow, your money grows within the period it sits in the account.

However, note that it is rare for checking accounts to offer you interest. It is usually reserved for some special types of checking accounts. Even when interest is offered, it is a small percentage compared to other savings or investments oriented account types 

Alongside these two major advantages of using a checking account, some other advantages include:

  • Access to a debit card for easy use of money
  • Ability to track the record of your deposits and spending which is provided by the financial institution
  • FDIC insurance ensures extra security in case of any unfortunate event.

Overall, a checking account is good if you want unlimited access to your money and do not mind not earning substantial interest on the money you leave in your account.

Drawbacks of Checking Account 

Regardless of its advantages, checking accounts have their drawbacks.

Very Low Or No Interest

Most checking accounts come with no Interest at all. The few checking accounts that do come with interest come with very low interest. It is only a disadvantage to individuals who wish to deposit money for a long period of time and accrue interest during this time. 

Fees

Checking accounts comes with monthly fees you have to pay the financial institution for keeping your money. Although a few institutions offer free checking accounts, this is not the typical case. 

Another disadvantage is that some banks require minimum amounts of money to be retained in the account. However, most of the time, a minimum amount requirement is absent.

How to Choose a Checking Account

When choosing a checking account, there are a lot of factors to take into consideration. 

  • Check Insurance Status. Ensure that the financial institution secures your money with insurance from either Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
  • Fees. Checking accounts charge a lot of fees. They include a monthly service or maintenance fee, overdraft fee, non-sufficient (NSF) fee, and ATM fee that are typically charged monthly. However, the fees charged by financial institutions differ, so checking to see the number of fees you incur from using a checking account is important.
  • Possible Interest. Checking accounts do not usually offer interest, however, there are a few that offer it. The average APY of checking accounts that offer interests is 0.04% per year, while some even offer more. Checking to see that you at least enjoy interest on your money, no matter how little, is recommended. Also, check for mobile app integrations and the banking features you enjoy with it.
How to Choose a Checking Account
Source: DollarSprout

2. Savings Account

A savings account is another type of deposit account held at a bank or other financial institution. Compared to the checking account, it offers you higher interest rates. This type of account serves as a very secure and reliable option for the money you intend to control access to and use to satisfy short-term needs. 

When it comes to withdrawals, a savings account gives you enough flexibility to manage money for emergency funds, save up for the purchase of a house or car, and to earn extra money through interests from savings.

However, the flexibility you enjoy with regular savings accounts means that the interest on your money is low compared to more restrictive savings instruments or investment accounts. The amount of money you are allowed to withdraw from a savings account is generally unlimited, while the interest you earn on your money is considered taxable income.

How to Open a Savings Account
Source: TheBalance

A Savings Account is Good for…

Liquidity And Ease Of Access

A savings account is a liquid asset, meaning it deals in cash. With savings accounts, you do not worry about selling investments or making other complicated moves to access your money as it is saved in the form you save it as.

Savings accounts also come with a certain level of accessibility. Compared to longer investment accounts, these accounts are easy to open and allow you to withdraw and deposit money at any permitted time either directly at the financial institution, or via ATMs, online access, or other electronic means.

Financial institutions also allow you to link your savings account to other accounts, like a checking account. An option like this means you enjoy a seamless experience when managing multiple accounts and possibly avoid costly overdraw fees. 

Insurance And Protection

Opening a savings account with a bank that is a member of the FDIC (Federal Deposit Insurance Corporation) or NCUA means your money of up to $250,000 is safe from vanishing due to unfortunate events.

Interests

Even though interest rates may not be as high as other investment accounts, saving accounts offer you an average interest rate of 0.9% and high-yield interest rates of up to 2.05%. It is visibly higher than the national average of 0.04% offered by checking accounts.

Some other benefits you enjoy from using savings accounts include:

  • Low startup fees of as little as $1
  • Automated bill payment capabilities
  • Absence of a lock-in period that keeps you with a financial institution for a defined period of time.

The Drawbacks of a Savings Account

Minimum Balance Requirements

Most savings accounts require a minimum balance or the payment of monthly maintenance fees in place of minimum balances. If your savings account falls below the minimum balance requirement, your financial institution deducts fees from your account which eventually override the interests you earn.

Federal Withdrawal Limits

Due to regulations, savings accounts have federal withdrawal limits of up to six times per month. Exceeding this frequency attracts a fee charge from your financial institution.  When you keep exceeding this federal limit, your savings account may be converted into a checking account by your financial institution.

Low-Interest Rates

Savings accounts offer you lower interest rates when compared to some other types of accounts such as money market accounts or certificates of deposit (CD). 

Interest rates vary as your financial institutions are free to set and change interest rates as they wish. Also, an inflated economy reduces the value of your earned interest.

How to Choose a Savings Account

Apart from considering the processes and policies relating to deposits, transfers, and withdrawals on the savings account, there are other important factors up for consideration.

  • Check out the interest rate and APY offered to you by a bank. It is the main benefit you get when using a savings account over a checking account, getting it right is important. There is a national average of about 0.9% but financial institutions offer rates as high as 2.5%. Additionally, check the minimum initial deposit amount allowed by the financial institutions. These amounts range from about $5 to $100 for regular accounts.
  • Check its minimum balance requirement. Exceeding this attracts fees, so comparing different institutions and looking for the lowest you can get is crucial to maintaining a healthy savings account. Some institutions do not punish you for dropping your savings account balance below its minimum balance requirement.
  • Fees. Consider the fees charged and the rate tiers on the savings account. Fees include low balance fees, annual or monthly maintenance fees, dormancy/inactivity fees, or ATM fees. Some savings accounts also offer you higher interest rates when you meet some qualifications. A savings account with a low threshold for substantial interest rates is the best choice. 
  • Access to mobile applications and ATM cards is also important.

3. Money Market Account (MMA)

A money market account (MMA) is a type of interest-bearing account offered by a bank or credit union that pays a higher interest rate than regular savings accounts. 

This type of bank account often includes check-writing and debit card privileges. It is also called a Money Market Deposit Account (MMDA), which is not to be confused with a money market mutual fund. 

Although they come with some features not found in other types of accounts, money market accounts also come with restrictions that make them less flexible than a regular checking or savings account. It is important for calculating tangible net worth.

Money Market Account Infographic
Source: Mint.intuit

A Money Market Account is Good for…

Insurance Protection

Money market accounts serve as low-risk savings options. They are insured by the Federal Deposit Insurance Corporation (FDIC) and your money is protected by the government up to allowable limits.

Interest Rate 

Money market accounts typically have higher interest rates than traditional savings accounts. They allow you to earn more when you deposit money into an account for a long period than a savings account might.

Easy Access to Money and Flexibility

Money market accounts offer you immediate access to your money whenever you need it, as your money is not under lock and key or protected by multiple fees. It makes it a more appealing option for saving emergency funds while enjoying higher interest rates. 

You can withdraw without paying a fee as you might with a certificate of deposit (CD) but there is a general transaction limit of 6 per month.

Additionally, MMAs offer you electronic, online, and in-person banking options, which means you gain quick access to your money by withdrawing, transferring, or writing checks. Some banks even provide you with an ATM debit card.

Drawbacks of Money Market Account

Higher Minimum Deposit And Balance Requirements

Some banks or financial institutions require you to pay a higher minimum deposit than a checking or savings account when opening a Money Market account. 

You are also typically required to keep a minimum balance at all times. Going below the minimum balance results in you being charged monthly maintenance fees. Money Market accounts are designed to help you save, as a result, they have a general transaction limit of 6 per month. Just like savings accounts, you have limited access to your money. Checking accounts are the better option in this regard.

Very Inconsistent Savings Interest Rates

Interest rates on money market accounts change depending on the overall market’s interest rates at a given time. It could be both an advantage and disadvantage, as rates can both increase and decrease. The possibility of interest rates decreasing is one to be wary about.

Lost Investment Opportunities

Without any intention of touching your money for a long time, consider other options that offer higher return rates than a Money Market account.

How to Choose a Money Market Account (MMA)

When choosing a Money Market Account, it is important that you consider the following:

  • Account's Annual Percentage Yield (APY). Consider the account’s annual percentage yield (APY) and the policies surrounding it. For instance, you could earn an APY for balances under $50,000 and a higher APY for balances that surpass that threshold.
  • Minimum Balance Requirement, Fees, and Withdrawal Options. The minimum balance requirement on the account is another important factor to consider as well as your withdrawal options and fees paid on the account.

4. Certificate of Deposit (CD)

A certificate of deposit (CD) is a banking option offered by financial institutions that provides you with an interest rate premium in exchange for you leaving a lump-sum deposit untouched for a determined period of time. 

A lot of consumer financial institutions offer them, with Certificate of Deposit terms being up to each bank. Even though some of the best rates come from promotional offers, a  brick-and-mortar bank might pay considerably little on even long-term CDs while an online bank or top bank pays three to five times the national average.

Although you lock your money for a longer duration when you open a CD, you are also typically given options that allow you to exit the deal early.

Certificate of Deposit (CD) Working Process
Source: The balance

A Certificate of Deposit Account is Good for…

Insurance Protection

Alongside checking, savings, and money market accounts, CDs serve as one of the safest mediums of keeping your money. As long as you choose an NCUA (National Credit Union Administration) or FDIC-insured bank, your money remains insured. Your money is insured if your bank shuts down or some unfortunate event occurs.

However, there are limits to what can be insured. An amount of $250,000 per depositor, for each account ownership category, and per financial institution is set as the maximum coverage. 

Guaranteed Returns

CDs serve as forms of long-term investments that guarantee you a positive return. It is easy to predict how much you earn from your investment over time as rates are typically fixed for the entire term. 

Higher Rates And No Maintenance Fees

When compared to savings accounts or money market accounts, Certificates of Deposit potentially offer higher interest rates on deposits. You agree to keep your money in the Certificate of Deposit account for a set time period. The interest rate and APY you earn depend on the bank, the Certificate of Deposit terms, and the current interest rate environment. 

Certificates of Deposits also shield you from being charged maintenance fees. Maintenance fees, in the case of savings and checking accounts, eat into the interest accrued from saved money. With a Certificate of Deposit account, you boycott these fees. You enjoy your full interest and the potential of making more money from your savings.

Certificate of Deposit Laddering

An intuitive savings technique called CD laddering is also available to you. A CD ladder exists when you open multiple CDs at different interest rates and with varying dates of maturity. Your money is kept liquid and accessible while taking interest rate changes into account. 

As you have CDs that are maturing, you can decide to take your money out of one and put it into a new CD to take advantage of higher rates.

Drawbacks of a Certificate of Deposit Account

Accessibility

According to terms agreed upon, a certificate of deposit account typically requires you to keep the money in place until the CD matures. A Certificate of Deposit account is not the best choice for your emergency fund. 

Savings accounts, checking accounts, and money market accounts come with a debit card or ATM card. You are also allowed to write checks against your balance with the above bank account types. Certificates of deposit typically do not offer these accessibility features.

Withdrawal Penalties

CDs exist only for the major purpose of holding money for a long period of time. Although you are not prevented from withdrawing your money, doing this before the predetermined term lapses can attract penalties. 

Penalties can be in the form of a flat fee, a percentage of the interest earned, or even the whole interest to be earned.

Low-Interest Rate Risk

CDs are also characterized by low-interest rates when the term of the agreement is within a single year. High rates are important and usually determined by how long you intend to keep the money. You do not get that when the duration of your agreement is short. 

Another risk involved with a CD is when your interest is locked and interest rates increase soon after. Without an option to exploit this increased interest rate, you do not have a chance to exploit it without opening a new certificate of deposit.

Another disadvantage of using a Certificate of Deposit is the risk of an inflated economy diminishing the value of the interest gained from the money saved. The opportunity cost of not being able to use the money for more profitable investments is also a drawback.

How to Choose a Certificate Of Deposit (CD)

  • Check for Insurance. When selecting a bank or financial institution for your CDs, make sure that this institution is FDIC or NCUA protected. 
  • Consider the Term Length. Take note of the CD term length which usually ranges between 3 months to five years. This factor is important as your money cannot be withdrawn without penalties and you can not make any additional deposits within this period. Additionally, the longer the CD term, the higher the rate. The term length of your CD agreement is very important.
  • Check Interest Rate. Making sure that your interest rates are higher than the average interest rate is also important. The national average APY on CDs for a year ranges from 0.05% to 0.35%. This estimate is for deposits under $100,000. Checking out for CD rates that offer an APY greater than the national average without compromising your preferences is important. Some other important considerations include the minimum deposit requirement and the form of the early withdrawal penalty.

5. Individual Retirement Agreement (IRA)

An individual retirement account (IRA) is a type of account that gives you tax advantages. It serves as an appropriate account helping individuals save and invest for retirement. 

The term “individual retirement arrangements” (IRAs) is also used by the Internal Revenue Service (IRS) to broadly refer to individual retirement accounts, individual retirement annuities, and other trusts and custodial accounts with tax advantages and set up for retirement purposes.

There are several types of IRAs: traditional IRAs, Roth IRAs, SEP IRAs, and Simple IRAs. Each has its own different rules concerning eligibility, taxation, and withdrawals. The two most popular types of IRA accounts are the Roth IRAs and the Traditional IRAs. 

Roth IRAs include deposits made after taxes and which are not tax-deductible. Age limits are not placed on them, and withdrawing the specified minimum amount from your account is allowed. 

Traditional IRAs, on the other hand, include contributions that can be tax-deductible, tax-deferred earnings, and withdrawals that are taxed. After attaining the age of 70½ years, contributions are not allowed to be made and withdrawal of the required minimum amounts commences shortly after. 

Additionally, if you withdraw money from an IRA before attaining the age of 59½ years, you are typically subject to an early withdrawal penalty of 10%.

An Individual Retirement Agreement (IRA) is Good for…

IRAs Are Tax-Advantaged Accounts

Being solely used for providing sufficient retirement options for individuals, IRAs are set to be tax-advantaged. Although Traditional IRAs still include tax deductions, these deductions are not as high as regular tax deductions. Roth IRAs are available to you for complete exclusion from taxes.

You Get To Choose Savings Investment

With IRAs, you enjoy control over how your savings are invested. From individual stocks and bonds to mutual funds to certificates of deposit, IRAs allow you to freely make a choice.

Other advantages of making use of an IRA include:

  • Seamless money transfer for whatever investment reason
  • Easy setup and maintenance
  • No exceptional permission is required to use your money. However, it comes with the penalties for withdrawing before the required minimum age of 59½ years. You can get exemptions from the penalties on the following grounds: death, disability, medical expenses, first home payment, college fees, adoption reasons, and an agreement that allows you to take equal installments over your lifetime.

Drawbacks of Individual Retirement Agreement (IRA)

While the benefits of IRAs generally outweigh the drawbacks, there are a few worth mentioning.

Contribution Restrictions

Strict contribution limitations and policies placed on IRAs exist. To contribute, you or your spouse need earned income, the maximum contribution amount per person is placed at $6,000 (or $7,000 if you’re age 50 or older). If your modified adjusted gross income (MAGI) exceeds a certain level, you may not be allowed to contribute to a Roth IRA.

Penalties

IRAs exist for retirement reasons. Taking out your money before the set retirement age of 59½ years attracts a 10% penalty on the amount withdrawn. You avoid this 10% penalty if you have held the account for up to five years and reached age 59½.

Required Withdrawals

With IRAs, particularly Traditional IRAs, there are mandatory withdrawal requirements called required minimum distributions (RMDs). These withdrawal requirements start when you attain the age of 72 years.

The amount of the withdrawal is calculated based on your life expectancy and added to that year's taxable income. There is also a 50% penalty, plus taxes owed if you fail to take the RMD.

For Roth IRAs, there is no required withdrawal date. You get to leave your money in the Roth IRA to let it grow and compound tax-free as long as you live. All withdrawals are also tax-free.

How to Choose an Individual Retirement Agreement (IRA)

When choosing an Individual Retirement Agreement (IRA) account, some of the actions to take include:

  • Picking a company you trust
  • Awareness of fund and management fees
  • Considering how you want to invest your money
  • Deciding if you want annuities
  • Consider a lender that will offer a free meeting with financial advisors.

6. Brokerage Account

A brokerage account is solely for investment purposes. An investor opens an account and deposits money with a licensed brokerage institution, controls investment options or, if it is a managed account, the institution places trades on behalf of the customer. 

Where the account is managed, the brokerage institution acts as a trustee, manages funds in the account, and executes investment orders. Assets still belong to the investors or owner of the account who claims the profit and capital gains incurred from the account as taxable income.

A brokerage account exists to facilitate the buying and selling of stocks, bonds, exchange-traded funds (ETFs), and mutual funds. These types of accounts are also called taxable investment accounts and are typically opened at full-service brokers, discount brokers, and online brokers.

A Brokerage Account is Good for…

Seamless Accessibility For Investments

Brokerage accounts are made for one sole purpose; investments. Due to this, they allow you to easily move money from within your account to start buying investment securities such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds, among others. 

High Returns

Compared to other types of bank accounts, brokerage accounts have the potential of accruing more profits from the money you store in them. 

Accounts exist for investment purposes and, rather than being limited to very low rates that go as little as 0.04% per year, you have the possibility of enjoying more than a 100% profit from great investment exploits. 

Other benefits of using a brokerage account include:

  • Access to a large network of no-fee ATMs
  • Access to online research tool access, like computer trading software and fund research
  • Reduced fee structure for banking services, like account minimums and overdrafts.

Drawbacks of a Brokerage Account

Positive Returns Are Not Guaranteed 

Like every other type of investment account, and unlike properly managed checking, savings, MMA, CD, and IRA accounts, brokerage accounts do not guarantee you a positive or increased balance. 

Invested funds may lose value depending on investments and market conditions. You can lose a substantial amount of money to bad investments.

Some of the other major disadvantages of using a brokerage account include: 

  • Fees charged by financial advisors for planning services
  • Absence of lending products, like car loans or mortgages
  • Limited or absence of in-office services like direct cash withdrawals or checks from a cashier

How to Choose a Brokerage Account

When looking for a good brokerage account, you can follow these guidelines.

  • Check the Investments Options Available. It remains important to look at the investment options available to you. Options commonly exist as investments in individual stocks, options, mutual funds, exchange-traded funds, and bonds. The more uncommon investment options include investments in cryptocurrency, futures trading, and foreign currency exchange markets. Your investments will determine how satisfied your investment needs are and how much you will pay in commissions. 
  • Check for Fair Charges and Commissions. Commissions to buy and sell stocks are either charged per trade or share. Options trades often incur the stock trade commission and a per-contract fee. Some brokers charge a fee to purchase mutual funds, and ETFs trades are often subject to stock trade commissions. These are only a few investment options and, visibly, commissions differ on each.
  • Look out for brokers with a history of reliability.
  • Pay attention to account minimums.

Fit Your Bank Accounts to Your Needs

Banks offer different bank account times, each offering different features and benefits. Irrespective of the number of accounts you have, choosing the right accounts that fit your financial goals is essential.

Before you can choose a bank account(s) to fit your needs, you have to clearly define those needs. Then the next step is to select the bank account type that best fits those needs.

If you struggle with budgeting and need constant access to your money, a checking account is ideal for you. 

Also, if you want to achieve short to long-term financial goals such as the purchase of a car or home, consider a savings or money market account. For longer saving needs with a premium interest rate, the Certificate of Deposit account is the best fit.

Consider using an Individual Retirement Account (IRA) if you want to enjoy reduced taxes on your savings, and you want to invest for retirement. For investment purposes, the brokerage account is the best choice.

If you run a small business, consider using the best bank accounts for small businesses such as Wells Fargo, BBVA, Comerica, SunTrust, and First Chickens Bank.

Always review your bank account costs and features regularly. If you find a better alternative, review it thoroughly and consider making the switch for more financial returns and other benefits.

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Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.