Savings Accounts

Because there’s a better place to stash your money than under your mattress. 

Savings accounts are a simple way to save money for future use, but even simple financial products have nuisances that you should be aware of. Whether you have one or are looking to open one, we’ll break down the key points you need to know.

What is a savings account?

Although banks try to market savings accounts to the public with fancier names such as “Way2Save”, “Holiday Club Account”, “Goal Saver” or “Daily Saver”, all of these accounts are the same. They each securely store your cash in a financial institution while allowing you to earn interest on the amount in the account.

Why would I need a savings account?

Savings accounts are used for short-term goals (usually 2 years or less) when tying up the cash in an investment account doesn’t necessarily make sense. Many individuals keep their rainy day fund or their emergency fund in a savings account, but these accounts can also be used to save for near-term goals, such as travel, a wedding, big-ticket items or anything that will be purchased with cash in less than 2 years.

Where can I get a savings account?

Savings accounts are common and can be found at local banks, online banks, investment firms and insurance companies.

What information do I need to provide to open a savings account?

Typically you’ll need a Social Security number and a form of identification, such as a driver’s license, state ID, passport and/or birth certificate. Online institutions may request you upload a copy or photo of your driver’s license, state ID and/or passport for verification purposes. If you are younger than 18 (in most states), you’ll need a parent or guardian to co-sign the account.

Are savings accounts insured?

All savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to a limit of $250,000. This limit combines the balances in savings accounts, checking accounts, Certificates of Deposit (CDs), and money market accounts at the same institution, under the same account owner.

Unless you’re holding more than $250,000 in your account, there’s no need to worry about the bank failing or somehow losing your money. Those who indeed have more than $250,000 in their account could do one of the following to ensure their money is safe:

  1.  If you have a partner, create a joint account at the same institution where you have your existing individual account, since FDIC regulation provides coverage on a per-owner basis.
  2.  Move money to different financial institutions, as the FDIC insurance also covers your accounts on a per- institution basis.
  3.  Open an account at a Massachusetts-based bank, where bank accounts are insured above the $250,000 FDIC limit through the Depositors Insurance Fund.

If you’re still curious about how to avoid the FDIC limits, their website does a great job of explaining what accounts are covered and even provides a calculator to estimate your FDIC coverage.

How do I deposit or withdraw money?

Within the same institution, you’ll be able to link your savings account to another account and transfer money back and forth, usually with no wait time to access your money. Additionally, most bank and online savings accounts will allow you to add an outside institution to your account, utilizing the routing number and account number of the account you would like to add. Once your accounts are connected, you can transfer money between them.

Depending on the institution, you may also be able to deposit money through ATMs, wire transfers, bank tellers, and/or check deposits.

How often can I withdraw money from my savings account?

Since savings accounts are meant for you to keep money in them, the Federal Reserve Board law limits the number of transfers and/or withdrawals from these accounts to 6 per month. You should also be aware that banks may impose their own limits that are stricter than the federal law, including limiting transfers to 3 or 4 times per month, while also imposing a fee if you withdraw more times than the bank allows.

Withdrawals or transfers made at ATMs, in person at a branch, or by phone (when a check is mailed to you) don’t count towards the federal limit but may count if your bank imposes their own limits.

When is a deposit available to be withdrawn or transferred?

It may take a few days (1 to 5) for the money to be accessible. Transferring money between two accounts at the same financial institution allows quicker access to the funds then transferring funds between two different institutions.

Bonus Alert: Recently, some online savings accounts have started to calculate interest on your deposit the day you schedule the transfer, instead of waiting for the funds to become available in your account.

How do I earn interest on a savings account?

The amount in your savings account automatically earns interest on a given interval, depending on the terms of your account. Remember, the more frequent the interest is paid, the more compound interest (interest earned on interest) you’ll receive.

Traditional banks (like the one in your neighborhood) tend to pay very little interest, as low as 0.01%. Online savings accounts typically pay higher rates, with many paying above 1.80% (as of 11/25/19), which makes them a better alternative to traditional banks.

Additionally, some banks will have different levels of interest rates based on the total amount held in the account, called tiered accounts, or will require a minimum balance for you to even begin to earn interest. Others will offer teaser rates, which allow you to earn a higher rate of interest for the first few months, and then you will receive a lower rate after the initial teaser period. Some banks will offer a sign-on bonus that will provide you with cash if you open an account and meet certain qualifications.

Always check the terms of your account so you can understand how and when you will earn interest.

Are there any fees associated with a savings account?

It depends on the institution. Banks can charge an annual fee, an outside institution fee (transferring money to/from another institution), a minimum balance fee (you’ll be charged if you don’t keep a certain amount in your account), an expedite fee (moving your money quicker) and/or an excessive withdrawal fee. These are common types of fees.

Any of these fees will reduce the total return (interest plus cash bonus minus fees divided by your balance) that you receive for the year.

Again, always check the terms of your account so that you can understand what fees you could incur.

Are there tax implications with savings accounts?

Any interest or cash bonus earned on your savings account above $10 is taxable and you are required to report all taxable interest income to the IRS. The only exception to this is if your savings account is held within a tax-deferred account.

The taxable interest income is provided on Form 1099-INT by the financial institution holding your account and becomes available after the new year.

Which savings account is right for me?

You should choose a savings account that works best for you based on the terms and conditions of the account, as well as how often you’ll need access to the money in it. However, you should aim to achieve the highest interest rate possible based on your circumstances, which usually makes online financial institutions the best place to stash your cash. A quick search for online savings rates can provide you with a list of institutions to choose from.

All in all, savings accounts are a simple way to earn some interest on money that’s just sitting around. Just be sure to read the fine print and understand the terms of your account so you’re not surprised by any fees or transfer limits.

Now go grab that money from under your mattress, deposit it in your local bank, and then transfer it to an online savings account to get a higher interest rate.

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