- Different savings accounts can help you meet different financial goals, but each has its own pros and cons.
- Traditional savings accounts typically have the lowest interest rates but are widely available and usually come with in-person customer service.
- High-yield savings accounts offer the highest interest rates but can be cumbersome for cash deposits.
- Cash management accounts are designed for investors wanting to earn interest on money set aside for future investments.
Traditional Savings Accounts
They typically offer a lower interest rate than other types of savings accounts. But they’re federally insured up to $250,000 per account holder by the Federal Deposit Insurance Corporation (FDIC) if the account is in a bank or by the National Credit Union Administration (NCUA) if the account is with a credit union.
You can usually open a traditional savings account with an initial deposit of $100 or less.
Pros & Cons
When looking at the pros and cons of traditional savings accounts, you’ll consider interest rates, fees and convenience.
Pros & Cons of Traditional Savings Accounts
- Easy to open in-person or online.
- In-person help when you want it.
- Ability to deposit cash.
- Low interest rates.
- Monthly fees may be higher than interest earnings.
- May have to maintain a minimum deposit.
You can manage your savings account in person at a branch, online or via mobile banking, but some banks and credit unions may charge penalties if you make more than six withdrawals per year from your savings account. Almost all traditional savings accounts have restrictions about moving money out of your account. Know the bank’s policies before you open a savings account.
Who Should Open One?
Traditional savings accounts are best suited to people who save money for short- or long-term goals but aren’t concerned about earning the best interest rate. The accounts can be a sound choice if you place a premium on convenience, such as access to automated teller machines and the ability to get cash quickly. They’re also a good choice if you frequently make cash deposits.
Traditional and high-yield savings accounts are great ways to safely store your money. Both have their own pros and cons, so contact a financial professional to see which account would work best for your situation.
High-Yield Savings Accounts or Online Savings Accounts
Online-only banks such as Bread, Lending Club and Ally, among others, are the institutions that offer high-yield savings accounts. They offer interest rates up to 10 times the average Annual Percentage Rate — or APR — of a traditional savings account.
Without the burden of brick-and-mortar overhead that traditional banks have to pay for, online banks can afford to offer higher interest rates through their savings accounts. These high-yield savings accounts become one of the best options to maximize the return on your money.
And your money is safe, as long as your online bank is FDIC-insured. Ask this key question. Some banks aren’t insured.
Pros & Cons
With online-only savings accounts, you sacrifice in-person convenience for higher interest rates. You still could face bank fees if you make too many withdrawals in a month, a quarter or a year, depending on the bank.
All transactions and services are handled online. But many online banks offer traditional banking services such as ATM access, direct deposit and debit cards. ATM withdrawals may come with fees attached.
Pros & Cons of High-Yield Savings Accounts
- Higher interest rates, lower fees and lower minimum deposits than traditional savings accounts.
- Low risk compared to investments.
- Most high-yield savings accounts are FDIC-insured up to $250,000 per account holder.
- No physical branches exist. All business is conducted online and may be difficult to deposit cash.
- Interest rates may decline in the future.
- May not have ATM access depending on the bank.
Technology-first, online-only banks may also offer financial tools to help you build your savings in a high-yield account. These are usually apps for your smartphone or tablet.
Who Should Open One?
A high-yield savings account is a good fit for someone who wants higher interest rates than offered by a traditional savings account and for someone comfortable with digital banking (and banking on their phone).
If you don’t need to do much in-person banking, an online savings account may be more convenient. Many banks, even traditional banks, allow customers to deposit checks with a phone app. But if you routinely deposit cash, maintaining a traditional bank account may make it easier to deposit and transfer cash to your online account.
Cash Management Accounts
Cash management accounts, or CMAs, allow you to keep your savings accessible to invest in a brokerage or retirement account. They’re designed for people more interested in investing than saving. These accounts typically earn more interest than traditional savings accounts, but less than high-yield accounts.
CMAs aren’t available at banks or credit unions, but through brokerage firms, robo-advisors and similar non-bank financial institutions. But the accounts are affiliated with partner banks, making them eligible for FDIC protection.
Features of cash management accounts vary based on the brokerage firm, but they may include standard banking services such as the ability to write checks, use ATM cards, pay bills or transfer money to your other bank accounts.
Pros & Cons
Advantages of cash management accounts include easy investing and FDIC protection with some CMAs. Downsides include a lack of certain banking features and the fact that you may find better interest rates elsewhere.
Pros & Cons of Cash Management Accounts
- Accounts earn interest on the money you are waiting to invest.
- May provide higher FDIC coverage limits protection than traditional savings accounts.
- May feature standard banking services such as checking, electronic transfers and direct deposit.
- Interest rates are typically less than what high-yield savings accounts offer.
- Not all cash management accounts are FDIC insured — ask before opening a CMA.
- You may not have access to branch banking depending on the brokerage providing the CMA.
Who Should Open One?
Cash management accounts are a good match for people who want to earn interest on the cash they’ve set aside for future investment.
A CMA is also a sound option if you have more than the FDIC-insured limit of $250,000 in savings for all accounts in a single bank. Cash management accounts spread your savings around with multiple partner banks, expanding your FDIC protection.
Specialty Savings Accounts
Specialty savings accounts let you tailor to a specific savings goal rather than putting your money in an account where you pool all your savings. These accounts include different savings accounts, some purpose-built by law and some you can set up on your own.
Specialty savings accounts can help you save for everything for every financial goal, from sending your kids to college and buying Christmas gifts to covering medical expenses and funding your retirement plans.
- College Savings Accounts
- Coverdell Savings Accounts and 529 college savings plans provide tax advantages for the money you set aside for your kids’ college tuition and other education expenses. Contributions aren’t tax deductible on your federal tax return, but distributions are not taxed as long as they go to qualified education expenses, which vary by plan.
- Retirement Savings Accounts
- Roth and Traditional IRAs each provide tax advantages as you save for retirement. You don’t pay taxes on the money you put in a traditional IRA until you withdraw it. Contributions to a Roth IRA aren’t tax deductible, but you don’t pay taxes on the withdrawals.
- Health and Medical Savings Accounts
- Flexible Spending Accounts (FSAs) let you contribute money from your paycheck toward a medical savings account to pay for qualified medical expenses. The money you contribute is not taxed as part of your income. Health Savings Accounts (HSAs) provide similar tax breaks but are only available for people enrolled in a qualified high-deductible health insurance plan.
- Personalized Specialty Accounts
- You can set up personalized savings accounts at your bank or credit union for a specific goal, such as a Christmas Club account or savings accounts for a down payment on a car or new home.
Examples of Specialty Savings Accounts
Pros & Cons
Many specialty savings accounts offer tax advantages, but the ones that do have rules that may make it difficult to use your savings when you need it. They could also limit what you can use your savings for.
Pros & Cons of Specialty Savings Accounts
- Allow you to target savings toward a specific need or goal.
- Low or no monthly maintenance fees depending on the type of account.
- Some specialty accounts offer tax advantages.
- Many specialty accounts have strict rules and penalties if you withdraw money early.
- Some specialty accounts have strict eligibility rules on who can open an account.
- Earnings on some accounts may be less than a high-yield savings account.
Who Should Open One?
If you want to customize your savings for a specific goal — retirement, medical and health bills or a college fund — specialty savings accounts can provide tax advantages as you build savings that generate a return on your investment.
If you’re focused on having money saved for a specific need or goal, a specialty savings account can let you grow your savings toward it.