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Breaking Down Bank Account Types

Breaking Down Bank Account Types
Jacqueline DeMarco
Jacqueline DeMarcoUpdated January 4, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
There are many types of bank accounts that serve different financial purposes and have unique banking advantages and disadvantages. 

10 Different Types of Bank Accounts

Here’s a look at different bank account types, how they work, and their pros and cons. 

1. Savings Accounts

Offered by traditional and online banks and credit unions, savings accounts allow you to keep your savings separate from your spending while earning interest on your deposits. Though the interest rate is typically low, savings accounts are safe (your money is federally insured up to $250,000 per account holder, per ownership category, per bank).While the money in a savings account is accessible, you are typically limited to no more than six withdrawals per month. Even though the Federal Reserve lifted the six-per-month limit in 2020 in response to the pandemic, many banks still enforce this  limitation and will charge a fee if you exceed six (or in some cases nine) transactions per month.Pros:
  • Earn interest
  • Insured up to $250,000 
Cons:
  • Typically limited to six withdrawals per month
  • Interest rates are low

Joint Savings Account

A joint savings account is a savings account owned by more than one person. All account holders share full access to the account and can deposit or withdraw funds without approval from the other person.Recommended: How to Open a Savings Account

2. Checking Accounts

A checking account is designed for everyday money management. These accounts typically give you access to paper checks and a debit card, which you can use to make purchases or withdraw cash from ATMs. Unlike savings accounts, you can typically make an unlimited number of withdrawals and deposits each month. Also unlike a savings account, checking accounts typically don’t pay any interest. If they do, it’s generally a nominal amount. Similar to savings accounts, checking accounts are federally insured up to $250,000.  Some checking accounts charge a monthly service fee, though you may be able to get the fee waived by keeping a certain minimum balance or linking the account to a savings account.Pros:
  • Unlimited transactions
  • Comes with a debit card and paper checks
Cons:
  • Little to no interest earned on deposits
  • May charge monthly fees

Joint Checking Account

A joint checking account is a checking account that belongs to more than one person. All account holders share equal ownership over the assets in the account, and can deposit or withdraw funds at any time without the permission of any other account holder. 

3. Money Market Account

Money market accounts are savings accounts that offer some of the features of checking accounts, such as check-writing privileges and debit cards. These accounts typically pay a higher annual percentage rate (APY) than regular savings accounts, but often require a high opening deposit as well as a high minimum balance to avoid fees. Like other savings accounts, you are typically limited to six withdrawals per month from a money market account.Pros:
  • Deposits are federally insured
  • APY typically higher than a regular savings account
  • Comes with checks and/or a debit card
Cons:

4. CD (Certificate of Deposit)

A certificate of deposit (CD) is a type of savings account with a fixed interest rate that’s usually higher than a regular savings account. It also has a fixed term length and a set date of withdrawal, known as the maturity date. You might get a six-month CD or an 18-month CD, for example. If you withdraw your funds before the CD matures, you’ll typically pay a penalty.Like regular savings accounts, CDs are available at banks and credit unions and are federally insured. When you open a CD, you lock in your APY. That means even if market rates go down, you still get the higher rate. If market rates go up, however, you won’t get the higher rate.      Pros:
  • Typically earns more than a regular savings account
  • Federally insured
  • Fixed APY
Cons:
  • Ties up your funds for the term of the CD
  • If market rates go up, you’ll be stuck with a lower rate
  • Could potentially get a higher return with a riskier investment

5. Retirement Accounts

Retirement accounts, like Individual Retirement Accounts (IRAs) and 401(k)s, were created specifically to give people incentives to save for retirement. Virtually all retirement plans offer a tax advantage, whether it’s available up front during the savings phase or when you’re taking withdrawals. For example, traditional IRA and 401(k) contributions are made with pre-tax dollars, reducing your taxable income. Roth IRA and Roth 401(k) plans, in contrast, are funded with after-tax dollars but withdrawals are tax-free, so you aren’t taxed on any growth.Retirement accounts come with contribution limits. And, if you withdraw the money before you are 59½ years of age, you typically trigger some sort of penalty.Pros:
  • Offers tax advantages
  • Early withdrawal penalties encourage you to save
Cons:
  • Pay a penalty if you need to withdraw money early
  • Contributions are limited

IRAs

An IRA is an account set up at a financial institution that allows you to save for retirement with tax-free growth or on a tax-deferred basis. There are three main types of IRAs and each have different advantages: traditional IRA, Roth IRA, and rollover IRA.   

401(k)

A 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks. In some cases, employers will offer matching contributions.Recommended: Is Using an IRA to Pay Student Loans a Good Idea? 

6. Teen Checking

A teen checking account is a kind of joint account that a parent or guardian holds with  a teen-age child. Both the parent and the teen have full access to the account, including check-writing privileges, a debit card, and online banking.Teen checking accounts come with all the advantages of a traditional checking account, including unlimited withdrawals. They may also offer some extra features, such as financial literacy and education tools designed for young account-holders. In addition, parents may be able to set up the account so that they have purchase approval, receive transaction alerts, and can set limits on debit card usage.Pros:
  • No withdrawal limits
  • Federally Insured
  • Helps teens learn to manage their money
Cons:
  • Must be co-owned with an adult such as a parent or guardian
  • Little or no interest

7. Student Checking Accounts

A step up from on the financial independence ladder from teen checking accounts, student checking accounts don’t require an adult co-owner. This gives students some privacy, along with greater control over their financial lives. Along with all the usual benefits associated with checking accounts, student checking accounts may offer extra perks like low deposit requirements, lower maintenance fees, new member bonuses, and accessible campus banking options. Pros:
  • Low deposit requirements
  • Minimal maintenance fees
  • Federally insured
  • Debit, paper check, and electronic payment options
  • Unlimited withdrawals
Cons:
  • Little to no interest
  • Easy accessibility can lead to spending temptations for students

8. High-Interest Checking Accounts

A high-interest checking account works in a similar way to a normal checking account. You can set up direct deposits, use a debit card to make payments or withdraw cash, write paper checks, and feel safe knowing the account is federally insured. One key difference is that high-interest checking accounts earn more interest on deposits than standard checking accounts. They may also come with more requirements, such as:   
  • Making a certain amount of debit card transactions each month
  • Setting up at least one recurring monthly direct deposit
  • Logging into an online account once a month
  • Choosing to receive e-statements
  • Signing up for online banking
Pros:
  • Earns more interest than a traditional checking account
  • Federally Insured
  • Unlimited withdrawals
Cons:
  • May charge fees
  • Strict account requirements

9. High-Yield Savings Accounts

A high-yield savings account is a savings account that typically earns more interest on deposits than a regular savings account. Like a traditional savings account, high-yield savings accounts are federally insured and typically come with withdrawal restrictions (such as no more than six per month).A high-yield savings account can be a great choice for short-term savings goals, like building an emergency fund or making a down payment on a car. However, even high-interest savings account rates generally don’t outpace inflation, which means this type of savings product may not be ideal for long-term savings goals, such as a child’s college education or your retirement.Pros:
  • Earns more interest than a traditional savings account
  • Federally insured
Cons:
  • Limited withdrawals
  • Could potentially earn more by investing the funds

10. Second-Chance Bank Accounts

A second-chance bank account is a checking account designed for people who may not be able to open a regular account due to a negative banking history.Typically, when you apply for a bank account, banks and credit unions will use a credit reporting agency called ChexSystems to check for any negative bank-related information, like overdrafts, bounced checks, and unpaid fees. If you have a negative banking history, you likely won't be able to open an account. With a second-chance account, the bank or credit union either doesn't check your ChexSystems report or is willing to look past your past mistakes.Second-chance accounts allow you to build a positive banking history, but typically come with some restrictions, such as no overdraft protection or no access to checks or a debit card. They may also charge higher-than-normal monthly fees. Pros:
  • Easier to qualify for
  • Allows you to build a positive banking history
Cons:
  • Monthly fees 
  • May come with limitations like no checks or debit card

Average Amounts in Bank Accounts 

According to the U.S. Federal Reserve’s most recent data, the average combined checking and savings account balance in the U.S. is $41,700. The median amount (the middle amount when all account balances are listed in ascending or descending order), however, is $5,300. This number is likely a better reflection of average savings in the U.S. because it eliminates outliers (like very large savings accounts owned by unusually high earners), which can skew averages.

Pros and Cons of Having Multiple Types of Bank Accounts

Having more than one bank account allows you to access different services and benefits. For example, a checking account is ideal for everyday spending but doesn’t earn interest, so you may also want to open an online high-yield savings account to grow your short-term savings.Having more than one account also gives you access to more insurance: The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per bank, per account holder, per ownership category. If you're lucky enough to have that much in the bank, getting an account with another bank increases the total amount of insurance protection you receive.On the downside, having multiple accounts can make it hard to meet minimum balance requirements needed to avoid fees. It can also make it difficult to keep track of your money, since you have to log in to multiple online accounts to check your transactions and keep track of your balances.
Pros of Having Multiple Types of Bank AccountsCons of Having Multiple Types of Bank Accounts
Can achieve different goals with different accounts Have to meet multiple account minimums
Can take advantage of different account benefitsNeed to keep track of multiple account balances, minimum balance requirements, and fees
Increase access to FDIC insuranceCan make it harder to stay organized

The Takeaway

There are many different bank account types on the market that serve different purposes — from easy spending (checking accounts) to meeting savings goals (savings accounts) to preparing for a happy retirement (IRAs and 401ks). The type of bank accounts you need will depend on your financial situation and goals. 

3 Money Tips

1. Because online banks don’t have the overhead costs that brick-and-mortar banks have, they may offer a higher savings account interest rate. Just keep an eye out for minimum balance requirements and monthly fees.2. An emergency fund is a key financial safety net. Aim to have three- to six-months worth of living expenses tucked away in a separate account that earns interest, but allows you to access the money if needed (such as a high-yield savings account). 3. To get into the savings habit, consider having 10% of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

What are the main types of bank accounts?
How many types of bank accounts are available for the average consumer?
What is the purpose of having different types of bank accounts?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Photo credit: iStock/howtogoto
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About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.
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