A saving strategy should be part of everyone’s financial plan. But with so many types of savings accounts, it can be hard to know which one to choose. It’s important to ask: what exactly are you saving for? Are you:
- Building a short-term emergency fund that lets you withdraw money at any time for any reason?
- Investing for your retirement security?
- Putting money aside for a planned project or expense?
- Looking to manage healthcare expenses?
Whatever your specific goals, there’s an account to help you achieve them. Here’s a brief overview to get you started.
Savings Account: simple and fully liquid
- This is the most basic of the savings account types, sometimes called a passbook account. It’s a simple option that offers low risk and less restricted access to your money.
Deposit or withdraw money as needed – most banks allow up to six withdrawals per month before incurring withdrawal fees - Earn interest on the funds in your account
Most savings accounts require a minimum balance (it’s $100 at Taylor Bank). If an institution offers FDIC insurance, balances of up to $250,000 are fully insured, which means peace of mind if you’re just getting started on your savings journey.
Certificate of Deposit (CD): higher interest rates, more restrictions
CDs typically offer higher interest rates but less liquidity than basic savings accounts. With a CD:
- You deposit a lump sum, which earns interest over a specified amount of time
- If you withdraw your money before that fixed term ends, you will likely incur a penalty
- Longer-term CDs generally offer higher rates
Consider this account if: you want to earn greater interest and don’t expect to need the money right away.
Health Savings Account (HSA): for healthcare expenses only
If you have a high-deductible health insurance plan, you can open an HSA. Unlike a regular savings account:
- An HSA can only be used for qualified medical expenses
- Enables you to save on a pre-tax basis
This means you don’t pay income tax on the money you contribute, so none of it goes to Uncle Sam. As a result, an HSA can help reduce your overall healthcare costs. For 2022, you can contribute up to $3,650 for individual coverage and $7,300 for family coverage. Any funds you don’t use will roll over from year to year, so you can build a substantial balance over time.
Consider this account if: you want to save money tax-free to cover medical, dental and vision expenses.
Individual Retirement Account (IRA): for long-term retirement investing
Unlike a regular savings account, an IRA is expressly designed to be a long-term retirement savings vehicle. There are two types.
- With a Traditional IRA, your contributions go in tax-free and withdrawals after age 59½ are taxable as ordinary income.
- With a Roth IRA, on the other hand, your contributions are taxable, but all withdrawals after age 59½ are tax-free.
There are several pros and cons of each, but most are contingent upon whether you want to pay taxes now, or later, and of course, all of this is subject to various restrictions, so be sure to do your research or talk to a financial professional. For 2022, you can contribute up to $6,000 to an IRA, or $7,000 if you are 50+.
Consider this account if: you want to save money for retirement on a tax-advantaged basis.
Money Market Account (MMA): a hybrid approach
MMAs generally pay a higher interest rate than regular savings accounts, and often include debit card and limited check-writing privileges. With an MMA:
- You can deposit or withdraw money at any time.
- You must deposit a certain amount to open an MMA, which differs by bank
- Maintain a minimum balance to avoid fees
At Taylor Bank, the figure for both the deposit amount and minimum is $750. Because checking accounts typically do not earn interest, this may be a good option if you only need to write a few checks per month.
Consider this account if: you want to earn higher interest and combine certain features of savings and checking accounts.
IntraFi Network Deposit: extra protection for large deposits
Bank deposits of up to $250,000 are usually covered by FDIC insurance. For higher amounts, you can utilize IntraFi Network Deposits.
- This option allows you to maintain a single banking relationship, but distribute your assets across various institutions in the network.
So you can work with just one bank, but get FDIC protection from several to insure your full deposit.
Consider this account if: you want full FDIC protection but your deposit amount exceeds the FDIC limit at any one bank.
Every family and individual should have a saving program in place to deal with surprise expenses and work toward larger financial goals. Taylor Bank offers each of the account types described above, and we’re always happy to help you sort through your options, weigh the pros and cons, compare fees and expenses, and choose the account that works best for you.
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