Money Management

Types of savings accounts, explained

PayPal Editorial Staff

PayPal Editorial Staff

June 25, 2024

June 25, 2024

Saving money is a foolproof way for people to achieve financial goals. But the best accounts to stash cash may depend on savings goals and timeframes. Some people may want emergency savings for unexpected costs and others may just want to feel more financially secure simply by having cash reserves.

From traditional savings accounts to money market accounts to CDs, here's a look where to put savings.

Setting savings goals

Saving and budgeting are often the core pillars of financial planning. Whether the financial goal is short term, mid term, or long term — this could include buying a home, preparing for a vacation, paying for education costs, or starting an emergency fund — a savings account may help people reach it.

Choosing a savings account

With different savings accounts to choose from, it’s important to consider a range of factors when selecting one.

Different accounts may offer varying interest rates, fees, and accessibility. Certain features may affect the ability to reach savings goals. Those shopping for a savings account should consider the following factors:

  • Minimum balance rules
  • Interest rates
  • Funds access
  • Account type
  • Account fees

Keep in mind, certain savings accounts often align with a specific type of financial goal so it's important to set goals before shopping around. Also, compare and contrast the features of each savings account before deciding on one.

Here are five common savings accounts to consider:

  1. Traditional savings accounts

    • Traditional savings accounts are covered by FDIC insurance, meaning the federal government insures deposit balances up to $250,000.
    • Traditional savings accounts may have minimum balance requirements and offer the ability to use a debit card for withdrawals and transfers.
    • These accounts are often suitable for everyday needs since they usually offer a high level of security and easy access to funds.
    • The primary drawback with traditional savings accounts is that they generally offer lower interest rates compared to high-yield savings accounts or other investment options.

  2. High-yield savings accounts

    • As the name suggests, high-yield savings accounts may have higher annual percentage yield (APY) — the percentage rate of interest earned per year — which may result in slightly more savings growth.
    • However, high-yield savings accounts may restrict account holders to a set number of withdrawals within a specific timeframe.
    • Some high-yield savings accounts may need account holders to maintain a minimum balance in order to get high interest rates.

  3. Money market accounts

    • Money market accounts blend the features of savings accounts with some checking account capabilities, such as check writing.
    • They may offer higher interest rates than traditional savings accounts, potentially helping savings grow faster.
    • Money market accounts may have higher minimum balance limits, which can restrict an account holder’s liquidity. This means quick access to cash held in the account may be difficult.

  4. Certificates of deposit (CDs)

    • Certificates of deposit (CDs) provide a fixed interest rate over a specific term, which can range from a few months to several years.
    • Funds in a CD are locked in for the term length and withdrawing money early could incur significant penalties.
    • CDs typically provide higher interest rates, offering a guaranteed return if the funds are left untouched for the full term.

  5. Retirement-focused savings accounts

    There are two main retirement savings accounts:

    • Traditional IRAs: Traditional IRAs enable tax-deductible contributions, with withdrawals in retirement taxed as ordinary income.
    • Roth IRAs: With Roth IRAs, contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement.

    IRA funds are generally less accessible before retirement, with penalties for early withdrawals. It's also important to note that the IRS sets annual contribution limits, so there's a limit to how much money can be put into these accounts. As of 2024, the limits are $6,500 for individuals under age 50, and $7,500 for people 50 and above.

Potential considerations for savings accounts

When choosing a savings account, it’s useful to assess minimum balance requirements, interest rates, APY, and funds access to find the best fit for financial goals and needs. Here's a summary of possible benefits and limitations of each type of account:

  • Traditional savings accounts may provide easier access to funds but they typically have lower interest rates.
  • High-yield savings accounts may provide higher APY but can come with limited withdrawal options and minimum balance requirements.
  • Money market accounts combine checking and savings features, though they may require higher minimum balances.
  • CDs set guaranteed higher interest rates for a fixed term but may limit accessibility due to early withdrawal penalties.
  • IRAs involve different tax considerations around both contributions and withdrawals, which can be an important factor.

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The content of this article is provided for informational purposes only. You should always obtain your own independent, tax, financial, and legal advice before making any material decision.

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