If you’re thinking about opening a new bank account, it’s important to know what your options are. Which type of account is best for your current needs?

The right type of account depends on your financial goals. Are you saving for the short term or for the future? Will you be using this account to pay your monthly bills?

The 6 types of bank accounts listed below are all designed with a different purpose. Keep your goals in mind as you compare and evaluate your options to find the type of bank account and type of interest rate that suits you best.

What are the different types of bank accounts?

Checking accounts

A checking account, simply put, is the type of bank account you’re probably most familiar with. This type of account is best for day-to-day spending. You can access your funds in this type of account by using a debit card or checks to pay for your expenses. 

In addition, many banks will let you connect your checking account to your digital wallets. These wallets, such as Apple Pay or Google Pay, let you use your smartphone to make purchases at participating retailers. 

By connecting your checking account to your digital wallet, you can use the digital service to access your account directly, bypassing the need for a debit card or a check.

For even more digital convenience, your checking account can also be used for direct deposit, letting your employer deposit your paychecks into your account automatically.

Most checking accounts, however, don’t offer any interest, so the money you deposit in your account isn’t working for you. 

They can also come with overdraft fees if you overdraw the account, spending more cash than you have, or monthly service fees if you let your balance drop below a minimum threshold.

When opening a checking account, be sure to ask:

  • How much do I need to deposit in the account to open it?
  • What are the monthly service fees?
  • What are the overdraft fees?
  • Is there a minimum balance I need to keep in the account?
  • If so, what are the fees for dropping below that amount, and how are they applied?

If you’re concerned about dropping below a minimum balance or even overdrawing your account, a personal finance management app like Simplifi can project your cash balances ahead of time to help you avoid those fees.

Savings accounts

A savings account is designed for short-term savings goals. It’s a great place to save money for an emergency fund, a vacation fund, a holiday spending fund, or any other savings that you might want to use relatively soon.

One important advantage of a savings account is that they usually offer to pay you interest on your account balance. The average interest rate for U.S. savings accounts in January 2022—reported as an annual percentage yield (or APY)—is 0.06%. 

That might sound low, but it’s just an average. Some online accounts offer rates that are slightly higher than average if you’re willing (or even want) to do all your banking digitally.

 A “high-yield savings account” can also earn you more money on your savings, but in most cases you’ll need to maintain a higher balance in the account to access those better interest rates. 

And, just like checking accounts, some savings accounts require a specific minimum balance to avoid fees, so be sure to watch out for that.

Federal law used to limit the number of withdrawals you could make from a savings account each month, but that’s no longer the case. Still, some banks have kept the requirement in place, so be sure to ask about withdrawal limits when you’re shopping among different banks.

If you don’t like the idea of having two different bank accounts—one for spending and another for your savings—consider a personal finance management app like Simplifi that lets you track your savings separately, even if you keep those funds in your checking account.

Money market accounts

Like savings accounts, money market accounts are designed for savings. They typically require a higher minimum balance, but they also usually pay higher interest rates than savings accounts.

Keep in mind that a money market account is not the same thing as a money market fund, which is a higher-risk account that involves investing.

Savings accounts, checking accounts, and money market accounts (but not money market funds) are all federally insured by the FDIC. In other words, if the bank goes out of business, you’ll still be reimbursed for any lost funds, up to $250,000.

Money market accounts may also come with access to a debit card and checks you can use to pay for unexpected expenses directly, making these accounts another good choice for your emergency fund.

Certificates of deposit (CDs)

A certificate of deposit (or CD) is a type of savings account that comes with a fixed term. That means you have to keep your money in the account until the term ends, or “matures,” to avoid incurring a penalty.

In exchange, the interest rates on a CD are much higher, and they’re fixed for the entire term. So even if interest rates fall, you’re guaranteed to receive the rate you originally agreed to. (On the flip side, if rates rise, you’re still stuck with the original yield.)

Maturity terms generally last from three months to five years, with longer terms yielding higher interest rates. Those longer terms, however, also require a higher minimum deposit. 

Since you can’t access the funds before the maturity date without paying a penalty, CDs are best used for savings goals with a distant timeline rather than something you might need at any time, like an emergency fund.

Also, it’s important to know that when the CD finally matures, the bank may automatically renew it with the same terms if you don’t proactively close the account. Be sure to ask about the renewal terms—and how to withdraw your money when the times comes.

A personal finance app is especially important if you’re going to invest in funds like CDs that tend to be “set it and forget it.” Track them in an app so you don’t forget them and let them renew by accident.

Retirement accounts

There are several different types of retirement accounts, all of which give you various tax advantages when saving for retirement. The advantages are so significant, in fact, that the law exacts penalties for withdrawing your money before retirement age, and it also limits how much you can contribute to these accounts each year.

Still, these accounts are excellent vehicles for retirement savings whether you contribute to an employer-sponsored plan through your job or open your own IRA.

Employer-sponsored plans

An employer-sponsored plan is exactly that: a retirement account provided by your employer, whether that’s a 401(k) or a 403(b). As you make your own deposits into these accounts, some employers will match those contributions up to a certain amount. You’ll have to pay taxes on your withdrawals after you retire, but be sure to wait until then before you access the account. Early withdrawals incur a 10% penalty.

IRAs and Roth IRAs

IRAs, on the other hand, are accounts you can open and contribute to on your own. 

Traditional IRAs provide tax deductions for the contributions you make to your account. In other words, you don’t pay taxes on the money you contribute. If you made $45,000 in a given year, and you contributed $2,000 to your IRA, you would only be taxed on $43,000 instead of $45,000.

Roth IRAs do not let you deduct your contributions as you make them. Instead, you pay taxes on your full salary, but then your withdrawals can be tax-free once you reach the age of 59 ½.

Brokerage accounts 

A brokerage account is a taxable account that lets you invest in the stock market. 

Whether you invest on your own through a private brokerage account or hire a broker to help you manage your investments, you’ll have to pay the same capital gains tax on your brokerage account earnings—but only when you sell those holdings.

In other words, when you buy stock, you don’t have to pay taxes on what you own if the price goes up, and you don’t get a deduction on your taxes when the price goes down. Your capital gains (or losses) are only calculated into your taxes once you sell, and the calculation is based on the price at which you sold it.

Brokerage accounts are not retirement funds, so you can sell your investments and turn those holdings into cash at any age. Still, financial planners do not recommend using brokerage accounts for short-term savings. Markets fluctuate up and down, and you don’t want to be forced to sell your investments during a downturn.

Final thoughts

No matter what kind of account you decide to open, ask yourself how you want to do business with that financial institution. Brick-and-mortar banks often charge more for the privilege of being able to bank in person.

Online banks, on the other hand, don’t offer literal places of business and often make it difficult to talk to a live person, offering help via chat or email. Instead, they offer higher interest rates or reduced fees as an incentive to bank with them.

If you decide to go the digital route, think about how you’ll want to access your information, including web & mobile app features. Some banking apps are better than others, and something as simple as a great design can make all the difference.

Still, no matter how great any particular banking app is, there’s no substitute for being able to get a complete view of all your finances at once. For that, you’ll need a personal finance app that can connect to all your accounts.

No matter which types of bank accounts you decide to open, or how many, stay on top of it all with Simplifi and track your budgeting, banking, savings, investing, and retirement plans all in one place.