When saving money for the future, be it a deposit for a house, creating an emergency fund, or getting ready for retirement, choosing the correct savings account for your situation is an important decision. But with so many different types of savings accounts available, it can be difficult to understand which offers the best benefits.
The first thought might be to maximize your return. A high annual percentage yield (APY) will help you to grow your savings quickly, but how will this be taxed and what happens if you need to make an unexpected withdrawal?
From differing rates of interest and access to your money, to charges and minimum balance or deposit levels, there are a lot of factors that should be considered depending on how you want to save.
This guide looks at a range of popular savings accounts to identify the advantages and disadvantages of each and help you choose the ideal savings account type for your circumstances.
Savings accounts - compared
Regular savings accounts
Regular savings accounts are the most common type of savings account and are used by many people for general, short-term savings. While these accounts are simple to open and do offer interest, the rates are often much lower than with other types of savings accounts.
Pros
- Regular savings accounts are easy to open and can often be opened and managed online
- Unlike other types of investments, a regular savings account does not require any risk to your money
- Interest can be earned to help grow your savings
- Funds remain easily accessible.
Cons
- Interest rates are low compared to other types of savings accounts
- Some savings accounts have terms and conditions associated with interest rates. Failure to meet these terms could see the interest rate offered on the account reduced, or fees charged. Example conditions include:
- Minimum balance
- Minimum monthly deposits
- Limits on withdrawals.
Money market accounts
A money market account (MMA) provides a combination of checking account and regular saving account features. While there may be limits on the number of withdrawals before a fee is charged , your money can be accessed whenever you need it via a debit card.
Pros
- Interest rates may be tiered meaning the higher your balance, the better your rates could become
- Access your money easily via debit cards and checks
- Easy to open an account online.
Cons
- Some banks may limit monthly withdrawals
- MMAs may require a higher minimum balance than other saving accounts. At First Merchants Bank, there is a $1,000 minimum deposit to open a Money Market Account.
Certificates of deposit (CD) accounts
Certificates of deposit (CD) savings accounts are a great way to secure high interest on funds in return for locking them away for a set period of time.
CD accounts begin by agreeing on a set term of up to five years, during which the initial deposit cannot be withdrawn without incurring penalty fees. The benefit is that this is almost guaranteed to collect interest during the term and once the term is complete, the funds become fully accessible.
First Merchants also offers a Smart Saver CD which uses regular, automatic deposits across a one-year term to make saving easy. Special rates on CD accounts are also available. Check your zip code to see the offers available to you.
Pros
- Interest rates are generally higher than those available for regular savings accounts
- No monthly fees
- Ideal for saving for mid-term goals as your money is locked up until an agreed date, helping you to save
- Terms can range from 7 days to 60 months, allowing you the flexibility to choose exactly the right account terms for you.
Cons
- Not suitable for emergency funds as withdrawing before the term completes can incur large penalty fees
- With your money locked in, your savings may not benefit from inflation related to consumer price rises.
High-yield savings accounts
High-yield savings accounts are similar to regular savings accounts, but with higher interest rates. These can reach as high as 5% annually but the rates are variable and will change depending on the interest rate set by the Federal Reserve.
Pros
- Higher interest rates compared to regular savings accounts
Cons
- Interest rates are variable
- Account holders may be limited to six withdrawals per statement cycle (The number of withdrawals will vary from bank to bank)
- Often available from online-only banks.
Health savings accounts (HSAs)
A health savings account (HSA) is a single purpose account designed to pay for medical expenses. To be eligible you must be enrolled in a high-deductible health plan.
Maximum contribution limits are set by the Internal Revenue Service (IRS) each year. For 2023, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage.
Qualified Medical Expenses include Deductibles, Co-insurance, and Co-payments. For more information regarding qualified medical expenses, please visit hsacenter.com.
Pros
- Contributions are tax-free
- Withdrawals are typically not subject to federal taxes if they are used for medical expenses
- Unspent account funds roll over each year.
Cons
- Maximum contribution limits
- Only available for those enrolled in a high-deductible health plan.
Individual retirement accounts (IRAs)
Individual retirement accounts (IRAs) are tax-advantaged savings accounts for retirement. While a 401k is often tied to an employer, IRAs are not, making them ideal for the self-employed. IRAs can be accessed when you reach retirement age.
Yearly contributions are capped by the Internal Revenue Service (IRS). In 2023, the limit is $6,500 per year, increasing to $7,500 for those aged 50 or older.
There are two main types of individual retirement accounts – IRA and Roth IRA. The main difference between them is when they are taxed:
- Standard IRAs are tax-deferred, meaning they will not be taxed until withdrawal
- Roth IRAs contributions are taxed, but earnings and withdrawals are tax free.
Pros
- Both IRA and Roth IRA are tax-advantaged options for retirement
- IRAs offer steady interest
- Choose to have either tax-deductible contributions or earnings
- People with earned income may contribute at any age.
Cons
- Early withdrawal from a traditional IRA (before the age of 59.5) can result in penalty fees of 10% in addition to taxes
- Annual contribution limits.
Which savings account is right for you?
| Account Type | Ideal for |
| Regular savings account | Instant access to short-term savings |
| Money market accounts | Mix of regular savings and checking account features |
| Certificates of deposit (CD) accounts | Mid-term savings for set goals |
| High-yield savings accounts | Maximizing return on investment |
| Health savings accounts (HSAs) | Health insurance savings |
| Individual retirement accounts (IRA) | Tax-advantaged retirement savings |
Frequently Asked Questions FAQs
How do I open a savings account?
Opening a regular savings account with First Merchants is quick and simple. Just enter your zip code to check the rates available to you and begin the process online in minutes.
How does interest work on a savings account?
Interest on a savings account is paid by the bank to the account holder. Interest is calculated as a percentage of the amount invested and is presented as an annual percentage yield (APY). An APY of 1% would mean that the account holder earns $1 per year for every $100 in the account. This percentage will vary between accounts and as interest rates change nationally.
What is the difference between a savings account and a checking account?
Checking accounts are intended for ongoing, instant access to your money. This is why they are commonly used for day-to-day expenses such as paying bills and shopping.
Savings accounts are intended to hold funds over a longer period and are typically used to save for a specific purpose, from buying a new car or a holiday to making the most of your retirement. Although the money held in a savings account is less accessible, they often pay a higher rate of interest than checking accounts.
How much money should I have in my savings account?
Emergency savings should be enough to cover your essential outgoings for at least three months. This will allow you to keep up to date with rent, energy bills, and other necessities if something unexpected happens, such as losing your job.
What types of savings accounts should I have?
Many people will choose to have multiple savings accounts serving different purposes. Ideally, this should include an emergency savings fund that can be easily accessed. Other options depend on circumstances – a CD for your children’s college fees, an MMA for a new car, or an IRA for retirement. By understanding the purpose of each account type, you can choose the savings options that are right for you and your family.
Start your savings journey today
Saving is something that can never be started too soon. From regular savings accounts and CDs to specialty accounts like HSAs and IRAs, First Merchants can help you to find the right account for your needs.
