Types of Accounts
What type of account is right for you?
Saving and investing for your goals will be easier and more convenient if you have the right types of accounts. These can range from basic savings, checking and brokerage accounts to specific accounts for retirement and for your kids. Not everyone needs every type of account, but it’s a good idea to learn about what’s available and how they can help you reach your goals.
A savings account is a basic way to start putting money aside for your goals. You can open a savings account at a variety of financial institutions, including commercial banks, savings and loan associations, and credit unions. You can deposit as much as you like in a savings account. Your money is protected by FDIC insurance up to $250,000, so you can feel confident you won’t lose it.
You also have the opportunity to earn interest in a savings account. This interest is expressed as annual percentage yield (APY).
You also have the opportunity to earn interest in a savings account. This interest is expressed as annual percentage yield (APY).
Important things to consider:
- The interest rates, benefits and terms of savings accounts vary from institution to institution as well as from account to account, so be sure to compare rates and fees before opening an account.
- Accessing money from a savings account is not always convenient. You may need to visit the bank or an ATM to access money.
- Some accounts require a minimum balance and have limits on withdrawals, payments and transfers.
- If you plan to withdraw money or need easier access to your money, a checking account may make more sense.
Most banks, savings and loan associations and credit unions also offer checking accounts. These accounts give you a lot of flexibility in depositing and withdrawing your money. Like savings accounts, there’s no limit on how much you can deposit into a checking account. And your money is FDIC protected up to $250,000.
Important things to consider:
- As with savings accounts, the terms and conditions of checking accounts can vary from bank to bank. Sometimes a single bank will offer more than one type of checking account. As you compare banks and types of accounts, pay special attention to minimum balance requirements, fees, and limits on checks and ATM withdrawals.
- Some checking accounts offer interest on the money deposited.
- Many checking accounts offer overdraft protection.
- Most financial institutions now have online banking capabilities. By logging into the banking website, you can check account activity, view your account statements online and make certain types of electronic transactions, such as transferring money between accounts and paying bills. Compare online services before opening your account.
A money market savings account is a high-yield FDIC-insured bank account. Interest rates for money market accounts are typically higher than rates on interest-bearing checking accounts.
Important things to consider:
- Withdrawals from money market accounts are usually limited to six per month, three of which can be made by check.
- Often a high minimum balance must be maintained to avoid fees.
- A money market account is not the same as a money market fund. A money market fund is a type of mutual fund.
A brokerage account is an account with a brokerage firm that holds your investments and allows you to buy and sell securities such as stocks, bonds, mutual funds and exchange-traded funds. Cash not invested is generally held in a money market fund.
Important things to consider:
- When choosing a brokerage firm, keep in mind that you’re not choosing a person, you’re choosing a professional firm. Don’t base your decision on a specific broker. Rather, look at the reputation, location and breadth of services a firm offers.
- If you’re interested in investing online, check out a potential broker’s website for the breadth of services, technology and security offered.
When it comes to saving for retirement, there’s nothing like a tax-advantaged account. Not only will your earnings grow tax-free, but you may also be able to deduct your contribution from your taxable income. Add to this the power of compounding, and you have an effective formula for growing your savings.
Types of retirement accounts
There are several types of retirement accounts, each suited to a different personal scenario and need. Choose any of these categories to learn more:- Individual Retirement Accounts (IRAs).
- Employer-sponsored retirement accounts: 401(k)s and 403(b)s.
- Small business retirement accounts.
Our two cents
Whatever type of retirement account works best for you, make a commitment to saving as much as you can and stick with it. One sure way is to make retirement savings a line item in your budget.
The type of account you choose for a child will depend on your goals. If you want to give a gift of money to a minor—and at the same time introduce the world of investing—a custodial account can be a good choice. A custodial Roth or traditional IRA is another option if the minor has earned income.
But if you want the money to help pay for the child's college education, one of the best choice will likely be a 529 college savings plan or an Education Savings Account (ESA). And if your primary objective is to transfer a large amount of wealth to a child, the best solution is probably a trust.
But if you want the money to help pay for the child's college education, one of the best choice will likely be a 529 college savings plan or an Education Savings Account (ESA). And if your primary objective is to transfer a large amount of wealth to a child, the best solution is probably a trust.
| Which Type of Accounts Is Right for You? | |
| If you want to ... | Than consider ... |
| Start saving and investing for a child's education. | A 529 plan or an Education Savings Account. |
| Give a child a monetary gift and teach investing skills along the way. | A custodial account. |
| Help a teen (who has earned income) start saving for retirement. | A custodial Roth or traditional IRA. |
| Transfer a significant amount of wealth to a child. | A trust. We recommend that you consult with an attorney to determine the best way to meet your needs. |