Types of Savings Accounts Explained

Find the right savings account for you and your money.

Many piggy banks represent the many types of savings accounts you may choose from.
(Image credit: Getty)

Savings accounts are an easy way to set aside money and develop financial discipline. Once upon a time, passbook savings accounts were the norm. Those days are long gone and your options now may seem endless, if not a little confusing. 

Here's a look at the different types of savings accounts and how they work. It’s up to you to decide what your savings goals are and which account will get you there the quickest. Use our savings calculator to see how much interest you could earn when you decide to save. 

Types of savings accounts

Traditional savings account

The OG of savings accounts. These accounts can be opened at your brick-and-mortar bank or credit union. Interest rates offered by these accounts are typically low. Unique to traditional accounts—you can visit a branch if you need help or want to deposit cash. 

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Important to remember:

  • You may be limited to up to six transactions per month before you are charged a fee, not including ATM withdrawals or in-person withdrawals 
  • Traditional savings accounts offer a small amount of interest compared to other types of accounts 
  • Monthly maintenance fees may cancel out interest earnings

Online savings account

Do you use the internet to manage many of your day-to-day activities? Or maybe you want to reduce the amount of free time you spend running errands? An online savings account may fit into your lifestyle better than a brick-and-mortar bank. There are many types of online savings accounts to choose from. 

Important to remember:

  • Online banks have lower overhead costs, which allows them to offer you lower fees and better interest rates 
  • You can review your bank statements, pay bills and transfer funds at any time 
  • You can't deposit cash unless the bank is linked to ATMs that accept cash 

Specialty savings account

Specialty savings accounts are accounts you might use to save for a vacation or holiday gifts. Although you do earn some interest, the main reason most people open these accounts is to set aside money and have a lump sum available to spend at the end of the year or when the vacation or other event comes up. 

Important to remember:

  • You save by depositing a specified amount at regular intervals, usually weekly, and earn interest on your savings
  • A club account holds your money until a specified withdrawal date
  • You may incur penalties for early withdrawals

High-yield savings account

A high-yield savings account is a savings account with a variable interest rate typically higher than retail brick-and-mortar banks. High-yield savings accounts pay a higher than average annual percentage yield or APY on deposits. The interest on these accounts is compounded daily and posted to accounts monthly. 

Important to remember:

  • High-yield savings accounts are great options for emergency funds and short-term savings goals, such as a vacation or big ticket purchase
  • You'll be able to accumulate more cash in a shorter period of time because the rate of return on these accounts is better than traditional savings accounts
  • You can usually access and withdraw funds from your high-yield account up to six times a month without incurring penalties

Cash management account (CMA)

Cash management accounts are designed for people with large cash holdings they want to keep safe but easily accessible. They are available online from non-bank financial service providers.

When you deposit or withdraw money, your custodian directs funds or removes funds from the different accounts as needed so all your money remains insured.

CMAs protect your money by dividing your deposit into multiple accounts at different banks. For example, if you deposit $1 million into a cash management account, the brokerage might put sums of $200,000 in accounts at five different banks. Distributing the cash among the five banks enables all of your $1 million to be protected by FDIC insurance. 

Important to remember

  • CMAs offer a way to streamline cash management, combining the features of an interest-earning savings account with a traditional checking account 
  • Accounts usually offer debit cards, check writing privileges, money transfers, bill payments, and overdraft programs  
  • Some cash management accounts reimburse ATM fees, leaving you free to use any convenient ATM

Certificate of deposit (CD)

A certificate of deposit (CD) is a type of savings account that holds a fixed amount of money for a fixed period of time, which can be anywhere from three months to five years. In exchange, CDs pay higher interest rates than standard savings accounts, though you won’t be able to access your cash at will. 

Important to remember:

  • CDs offer you a risk-free investment option that earns a fixed, predictable rate of return on your savings 
  • You will likely incur a fee if you withdraw your money before the CD’s maturity date
  • Typically, the longer the CD term, the higher the APY, but this can vary by institution and interest rate volatility

Find the highest yielding accounts for 1-year CDs, 3-year CDs and 5-year CDs  by using the below tool — powered by Bankrate — to compare CD rates. 

Money market deposit account (MMDA)

A money market deposit account (MMDA) is a type of savings account offered by banks and credit unions. The money you deposit earns interest at a variable rate, though the APY tends to be higher than a traditional savings account. The rate depends on the financial institution and the size of the balance in your account. MMDAs may come with a debit card or checks that you can use to withdraw money. 

Important to remember:

  • MMDAs are good for storing short-term cash for your emergency fund and for large and infrequent expenses, such as college tuition or tax payments
  • The number of allowed withdrawals can vary from bank to bank. However, you can usually make unlimited withdrawals and payments by using an ATM or by making the withdrawal in person
  • Be careful when withdrawing funds as many MMDAs have a minimum balance requirement and sometimes impose monthly maintenance fees if you don't maintain the minimum balance

Health savings account (HSA)

Health Savings Accounts (HSAs) can be a powerful tool to help you save for future medical expenses. They offer multiple tax benefits you can take advantage of to lower medical expenses. But you have to be comfortable paying out-of-pocket for services and prescriptions that previously only cost you a co-pay.

Eligibility is limited to people with high deductible health insurance policies. How high of a deductible? There is a minimum amount that is set by the IRS and adjusted for inflation annually. For 2023, your policy must have a minimum annual deductible of $1,500 for individuals and $3,000 for families. The maximum annual deductible and out-of-pocket expenses cannot exceed $7,500 and $15,000, respectively.

As long as your policy meets that threshold you can open an account. You may contribute up to $3,850 if you have a self-only policy, or $7,750 for family coverage.

Important to remember:

  • HSA funds can only be used to pay qualifying medical expenses and penalties will apply if the funds are used for non-qualifying expenses 
  • Even if you don’t itemize your deductions, you can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA 
  • The contributions remain in your account until you use them 

529 College savings accounts

529 plans are an easy way to get started saving for college. One of the benefits of 529 plans is the tax-free earnings that grow over time. The longer your money is invested, the more time it has to grow and the greater your tax benefits.

Many states offer tax benefits for contributions to 529 plans. You may only be eligible for these benefits if you invest in a 529 plan sponsored by the state where you reside. Earnings in a 529 account are not subject to federal income tax, and in many cases, state income tax, if withdrawals are used for qualified higher education expenses or tuition for elementary or secondary schools.

Before you start exploring 529 plans and their rules—you need to get familiar with some “jargon” to fully understand what you will be reading. The person who opens a 529 plan account is called the account holder or the saver. The person the account is opened for is called the beneficiary or the student, and the account holder can also be the beneficiary.

There are two types of 529 plans: 

Prepaid tuition plans let a parent purchase units or credits at participating colleges and universities (usually public and in-state) for future tuition and mandatory fees at current prices for the student/beneficiary. Prepaid tuition plans usually cannot be used to pay for future room and board at colleges and universities. Such plans also cannot be used to prepay for tuition for elementary and secondary schools.

Education savings plans let you open an investment account to save for your beneficiary’s future qualified higher education expenses—tuition, mandatory fees and room and board. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U.S. colleges and universities.

All education savings plans are sponsored by state governments, but only a few have residency requirements for the saver and/or beneficiary. This means you are not locked into using the 529 plan where you live. You can shop around. 

State governments do not guarantee investments in education savings plans. FDIC protection is not automatic and varies with education savings plan investments.

Important to remember:

  • Education savings plans can also be used to pay up to $10,000 per year per beneficiary for tuition at any public, private or religious elementary or secondary school 
  • 529 plan distributions of up to $10,000 can be used to repay qualified student loans of the beneficiary 
  • Distributions will be subject to state and federal income taxes and an additional 10% federal tax penalty on earnings if withdrawals are  used for non-qualified higher education expenses or tuition for elementary or secondary schools 

Individual retirement accounts (IRAs)

Is it ever too early to save for retirement? Opening and funding an IRA is a great start and especially useful if you are self-employed or if your employer doesn’t offer a retirement plan. You can open an account with a bank or brokerage. The best place to open an account is the place with investment options that match your investment profile. The type of investments your account holds will determine if your account qualifies for FDIC protection. 

Traditional and Roth IRAs

A traditional IRA is a way to save for retirement that gives you tax advantages. You can claim a tax deduction for your contributions and pay taxes on the account earnings when you take a distribution. Roth IRAs don’t provide tax relief upfront.  You contribute after-tax dollars to your Roth IRA and your distributions are fully tax-free at the federal level. 

For 2023, the total yearly contributions limits for traditional IRAs and Roth IRAs can't be more than $6,500 ($7,500 if you're age 50 or older), or less if your taxable compensation for the year exceeds modified adjusted gross income (MAGI) limits. Your deduction could be further reduced if you or your spouse are covered by a retirement plan at work. 

Important to remember:

  • To contribute to an IRA, you must have earned income, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment 
  • If you’re married and don’t work but your spouse does, then he or she can contribute to a spousal IRA for you
  • Kids who have any income from a job can open and contribute to an IRA 

The bottom line

When choosing a savings account, it’s important to remember that you don’t have to pick just one. Depending on what you want to achieve financially, you may decide to open a traditional savings account, CD account, money market account and/or a specialty account. To find the best account for your needs, consider your financial goals, timeline and tolerance to risk. 

Personal Finance Writer

Donna joined Kiplinger as a personal finance writer in 2023. Previously, she spent more than a decade as the contributing editor of J.K.Lasser's Your Income Tax Guide and edited state specific legal treatises at ALM Media. She has shared her expertise as a guest on Bloomberg, CNN, Fox, NPR, CNBC and many other media outlets around the nation. Donna graduated from Brooklyn Law School and University at Buffalo.