Guide to Online Savings Accounts

Q: Are online savings banks insured?

Virtually all banks in the United States, including online savings banks, are insured by the Federal Deposit Insurance Corporation (FDIC). All FDIC-insured banks are required to advertise themselves as Member FDIC institutions. You’ll automatically receive FDIC deposit insurance coverage if you open an online savings account with a Member FDIC bank. In general, the standard maximum deposit insurance amount is usually $250,000 per depositor, per insured bank, for each account ownership category.

Q: Do online savings accounts have a minimum balance?

Some online banks may require a minimum opening deposit. CIT Bank, for example, requires its customers to deposit at least $100 when opening a CIT Bank platinum savings account. But it’s common for online savings accounts to feature no monthly maintenance fees and no minimum balance requirements.

Q: Do I pay tax on my online savings account?

Yes, the interest you earn from your online savings account may be subject to federal and state income taxes. Interest income is generally a form of taxable income in the United States.

Q: Can I get a debit card from an online savings account?

You typically cannot get a debit card from an online savings account, but you may have the option of getting an ATM card. An ATM card vs. debit card are not the same thing. A debit card is usually linked with a checking account and may be used for a greater range of transactions than an ATM card.

What Is an Online Savings Account? How Does It Work?

Sulaiman Abdur-RahmanUpdated April 8, 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.

Online savings accounts are interest-bearing digital deposit accounts that you can access with your computer, tablet, or smartphone device. The online savings account description is a savings account that relies almost exclusively on financial technology as a banking product.An online savings account is a fintech-based deposit account that may allow customers to earn interest on their deposits. An online savings account generally does not accommodate in-person banking, so customer service may take place via telephone or electronic communications.How do online savings accounts work? Customers can deposit funds through direct deposit and may transfer funds through mobile banking apps. Customers may also have the option to withdraw funds from an ATM or deposit funds into their savings account with an ATM card.Below, we highlight the basics of an online savings account, how it works, and the benefits and drawbacks to having one.

What Is an Online Savings Account?

An online savings account is not a traditional savings deposit account offered by a brick-and-mortar financial institution. As mentioned above, an online savings account is a fintech-based deposit account that may allow customers to earn interest on their deposits.Virtually all banks, credit unions, and thrift institutions offer online banking or mobile banking apps in today’s day and age. So when we mention online savings accounts, we’re not talking about conventional retail banking products. That’s because the online savings account description is a savings account that relies primarily on financial technology as a digital banking product.What is an online savings account, and what is online savings account functionality? It’s a virtual savings account offered by institutions that conduct business primarily as a fintech or digital bank.As mentioned earlier, an online savings account generally does not accommodate in-person banking, so customer service may take place via telephone or electronic communications. An online savings account may not be right for you if you prefer in-person banking at your local bank, credit union, or federal savings and loan association.

How Does an Online Savings Account Work?

If an online savings account is a virtual or digital savings account, how does an online savings account work? Here’s how it works: You can log in and access your online savings account through a computer, tablet, or smartphone device. Once signed in, you can check your account balance and transfer money from bank to bank, among other things.A top savings account generally encourages saving more than spending. Customers with an online savings account may request an ATM card if their bank offers one. An online savings account ATM card may allow you to make account deposits or withdrawals at an ATM that accepts deposits.An online savings account features a routing number and account number, which you can use to set up direct deposit with an employer.Regarding the basics of an online savings account, how it works, and what you can do with it, an online savings account works like a digital banking account that may earn interest on deposits. You can use an online savings account to build an emergency fund with your annual percentage yield or APY.

How to Open an Online Savings Account

Opening a savings account with an online bank may require that you complete an application online and verify your identity with proper documentation. Some banks may require a minimum opening deposit amount, but online savings accounts generally feature no monthly maintenance fees and no minimum balance requirements.

Deposits and Withdrawals in an Online Savings Account

As mentioned earlier, customers with an online savings account may request an ATM card if their bank offers one. An online savings account ATM card may allow you to make account deposits or withdrawals at an ATM.You may also deposit checks into your online savings account through your mobile banking app or direct deposit. You can also withdraw money from your online savings account by transferring funds to different types of bank accounts.Recommended: What Is Direct Deposit?

Benefits and Drawbacks of an Online Savings Account

Below, we highlight some of the benefits and drawbacks of an online savings account:

Online Savings Account Pros

May allow you to earn compound interest on your deposits
May charge no monthly maintenance fees
May have no minimum balance requirements

Online Savings Account Cons

No in-person customer service or physical retail banking locations
Some online banks may not offer ATM cards
May have limitations on withdrawal frequency

Recommended: Guide to Withdrawing Money From a Savings Account

Types of Online Savings Accounts

Online banks may offer the following deposit account options:

Basic online savings account
High-yield savings account
No-penalty certificates of deposit (CDs)
Money market account
Cash management account (CMA)
Health savings account (HSA)

Tips for Choosing the Right Online Savings Account

How do online savings accounts work, and what is online savings account functionality? As mentioned earlier, an online savings account is a digital savings account solution offered by institutions that conduct business primarily as a fintech or digital bank.Banks, credit unions, and thrift institutions may offer online savings accounts. The terms and conditions of these accounts can vary by institution, so you may want to compare different online banks to choose the account that’s right for you.Here are five simple tips that may help:

Compare APYs
Check whether the account charges monthly maintenance fees
Check whether the account requires a minimum balance
Check whether the institution offers online savings account ATM cards
Check whether the online account features limitations on withdrawal frequency

Recommended: Guide To Christmas Club Savings Accounts

Alternatives to Online Savings Accounts

Online savings accounts may not be right for you if you prefer in-person banking services. Here are some alternatives to online savings accounts that you may consider:

Using a traditional savings account
Opening a checking account
Opening a share savings account at a federally insured credit union
Opening a joint bank account with your partner or spouse

Recommended: Is Opening a Savings Account Worth It?

The Takeaway

Depositing checks into a federally insured online savings account may be an option to consider. Online savings accounts may not charge monthly maintenance fees and may not require a minimum balance.If you’re looking to earn interest on your savings, Lantern by SoFi can help. Our online banking marketplace makes it easy to compare APYs and other account features. You can view different options and choose a bank account that’s right for you.Compare high-interest savings accounts with Lantern.

Frequently Asked Questions

Are online savings banks insured?

Do online savings accounts have a minimum balance?

Do I pay tax on my online savings account?

Can I get a debit card from an online savings account?

Photo credit: iStock/Dilok Klaisataporn

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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