Different Types of Bank Accounts: APY, Limits, Requirements, Liquidity, and Alternatives

What are the different types of bank accounts? Could there be another one offering you 10X more interest? What’s the right choice for business owners, students, veterans?

Over 95% of Americans own a bank account, yet many don’t have answers for these questions. Because banking can seem complicated, and the rates are changing all the time. While you’re thinking about it, your money is gone on inflation, taxes, and banking fees.

If you’re looking for a simple, detailed guide to choose your account, this article is for you.

Common Types Of Bank Accounts

Savings Accounts

Savings accounts have become the default way to store money. And while building your nest egg, your money earns up to 1% interest per year. Whenever you need some cash, you can access this fund from your bank.

The first problem you’ll find is the monthly transaction limit. And when comparing all other options, savings accounts aren’t that great for saving.

Annual Percentage Yield:

From 0.04% (national average) to 0.55% APY (high yield). Compound interest applies.

Requirements/Limits:

  • No minimum balance
  • There’s often a $5 maintenance fee that’s easy to waive
  • FDIC insurance up to $250K

Liquidity:

  • Withdrawals are limited to 1 to 6 times per month.
  • Includes automatic transactions, card purchases, and fee charges (e.g., overdraft)
  • Exempt withdrawal types include in-person withdrawals, using the ATM, and transferring from a checking account online.

If you have a balance of at least $10,000, you could waive withdrawal fees with a premium savings account.

Important: By the time you’re reading this, the Federal Reserve may have removed the transaction limit. Ask your bank when opening the account.

Variations:

Checking Accounts

If you want to freely spend money, you may need a checking account. There’s no transaction limit, it’s easy to pay (debit cards available), and you get rewards for doing so.

By default, checking accounts cannot go negative (unless there are automatic payments). But if you do overdraft, you’ll get a warning and 24-48h to solve the problem.

But if you’re going to hold money long-term (hopefully for interest), look somewhere else.

Annual Percentage Yield:

From 0% APY to 0.03% on average. While it’s lower than a savings account, checking accounts also include consumer rewards and cashback.

If a bank offers way above the average (such as CIT Bank’s 0.25% APY for checking accounts), make sure you read the conditions first.

Requirements/Limits:

  • Minimum balance to open below $100
  • No maintenance fees
  • FDIC insurance up to $250K

Liquidity:

Checking accounts have no transaction limit. If there is, it may be too high to reach (unless you run a business. Accessibility depends on other factors:

  • The withdrawal limit of your ATM (~$1000 per day)
  • Debit card monthly spending limit (which you can remove by calling the bank)
  • If you make a $10,000+ transaction, make sure you can justify the transaction. The banks will notify the IRS, which may lead to audits and unexpected taxes.

Variations:

Money Market Accounts

When choosing between checking and savings accounts, the middle option is money market accounts. You can keep high-interest rates while accessing your money anytime. It’s also free to transfer funds among your other accounts.

Because your account relies on the money market, the rates are variable (unfortunately, lower than advertised). Another caveat is the tiered interest, so only high-net-worth clients get the best APY. It’s free to keep a zero-balance account, but you won’t get any interest until you add $1000+.

Annual Percentage Yield:

From 0.25% to 0.50%.

Requirements/Limits:

  • No minimum balance is required to open a money market account
  • $0-$100 is the minimum balance required to generate interest
  • FDIC insurance up to $250K

Mind that the advertised offer is often the best one, reserved for clients with thousands of dollars of balance. That’s why rates can range from <0.25% to 1.25%+.

Liquidity:

Like savings accounts, the government limits transactions to six times per month. If you need more access to this fund, you’d need to either visit the branch, use an ATM, or transfer to another checking account type.

Variations:

Here are some money markets that affect the interest rate of your account:

Certificates Of Deposit (CD)

Maybe you don’t like the rates of a savings account. You want to hold money, but you neither trust the markets. So you create a certificate of deposit at 1.45% APY.

The rate changes based on the CD you choose:

  • Penalty-free if you don’t want to lock your money for 3+ years
  • Brokered if you want to trade your CD later (like bonds)
  • Adjustable if you want to get a better market rate
  • High-yield if you prefer variable over fixed rates
  • Inflation-protected if you just want to store

Annual Percentage Yield:

National rates range from 0.10% to 0.3%, from 6-month CDs to 5-year CDs. But if you find the right bank, the best rates are ~5x higher, 0.50% to 1.45% APY.

Requirements/Limits:

Liquidity:

Unless you’re using a liquid certificate of deposit, you cannot access the money (for free) until the end of the agreement. If you withdraw anyway, the bank will charge a flat fee plus X months’ worth of interest. It doesn’t matter whether you accrued it or not.

When looking for penalty-free CDs, understand the bank’s conditions:

  • Are withdrawals unlimited or only up to six times per month?
  • Is it always free, or is there a fee after a number of times?

Variations:

Special Types Of Bank Accounts

Brokerage Accounts

Let’s say you’re an investor/trade and want more liquidity. Every time you find a good deal, you have to move funds from your bank account to the platform. With a brokerage bank account, it’s all in one place.

And if you work with the bank’s suggested platform, you get a discount.

Let’s say you add $10,000 to the account and invest $9,000. You can spend the other $1,000 as you’d do with checking accounts: ATMs, credit cards, online purchases. And if you don’t spend it, these $1,000 earn annual interest distributed monthly.

Now, this APY means nothing if the service fees are expensive. Read the fine print!

Annual Percentage Yield:

From 0.05% to 1.9%. Brokers will increase your APY when you hold more money with them because that means you’ll also make their money when trading. But when keeping a small balance, it’s still reasonable to get 0.50% APY.

Requirements/Limits:

  • No minimum balance requirements to open a brokerage account (except for mutual funds/indexes)
  • No limit to how many accounts you can open
  • No maintenance fees (unless you get a premium account)
  • If you don’t verify KYC, you will find limitations on withdrawals, transactions, and fees

Liquidity:

  • Interest will credit to your account every day
  • Interest compounds every day
  • You can collect your interest every month
  • You can withdraw your initial balance anytime, also stopping the recurring interest

Variations:

While options depend on the bank, most will allow you to transfer stocks, bonds, mutual funds, ETFs, and trusts.

Retirement Accounts

Retirement accounts get tax advantages to growing your savings “faster.” You can’t withdraw until you’re 59½ unless you qualify for special plans (457b) or have a qualifying expense. What you can do is pay taxes first (Roth plans), so the interest earned is tax-free.

You can go safe with bonds/loans/annuities, or you can do stocks, real estate, commodities. Almost any security type qualifies for your retirement plan. You can try many first and graduate the risk as your portfolio grows.

With bad timing, the market could wipe out years of savings anytime. That’s why it’s preferable to have more fixed-rate investments as you approach retirement.

Annual Percentage Yield:

It’s common to get 7% – 10% in annual returns from IRAs, even with the safest investing strategy. Depending on what securities you add to the portfolio, this percentage could be higher.

Requirements/Limits:

  • All retirement plans have annual contribution limits. IRAs start at $6,000, although some exceptions allow $20K+ per year.
  • When withdrawing before the retirement age, there will be a 10% penalty fee. You also owe regular income tax for that money (double tax). Consider exceptions first.
  • After turning 59½, you have 5 years to make the first withdrawal to avoid penalty fees

Liquidity:

  • Can only access the funds during exceptions (unless you pay the penalty)
  • In normal conditions, you cannot withdraw any money until turning 59½ (55 for pensions)

This rule doesn’t apply if you get a 457b instead of 401k. Under this plan, you can withdraw at any age (e.g., 26) without any penalties. As many times as you need.

Variations:

Traditional VS Roth IRA Account

Joint Bank Accounts

Joint accounts can help you avoid complications when you still don’t have a reliable profile. You have a bad credit score/no credit score and no transaction history. If you open a joint account with someone with great credentials, you can borrow that credibility.

Both account holders spend with the same account, which is why you must choose someone you trust.

For high-net-worth individuals, joint accounts are useful to increase free insurance coverage. You get $250K insured by the FDIC, and every member of the joint account gets the same right. So you could add four people from your household and get $1M coverage, even if you’re the only one using the account.

Annual Percentage Yield:

Same rate as standard savings accounts (0.04% to 0.55% APY)

Requirements/Limits:

  • The minimum balance required is under $100
  • Both account members have full control of the funds regardless of the source
  • No maintenance fees, even with zero balance
  • The IRS taxes joint accounts with the 1099-INT form, sent to the primary holder. You pay based on your portion of ownership of the account (typically 50%). If the other member doesn’t pay taxes, however, it may become your responsibility.

When comparing joint with standard savings accounts, features aren’t that different. The “account conditions” depend on whatever you agree with the person you’re sharing it with.

Liquidity:

All account holders can access and withdraw funds without limiting one another. You can even have multiple debit cards using the same account balance. The problem comes with joint savings accounts, which only allow six monthly transactions.

Variations:

Business Bank Accounts

Even if you don’t own a business, this account will save you money.

Business accounts can help you budget, reduce taxes, and look more professional. Most importantly, you’re opening a bank account no creditor can touch. Whether you want to protect your business or your personal savings, it will require a business account.

For example, you create an LLC to legally separate both plans. If your business owes money, they can’t take it from your personal account. If you owe money, they can’t take it from the business account.

Annual Percentage Yield:

High-yield business accounts can reach 1.60% to 2%. For different types of bank accounts, business rates aren’t different from standard savings accounts.

Requirements/Limits:

For premium business accounts, you also get higher ATM withdrawal limits, waived fees, better credit rates. Besides the subscription fee, you’ll need a higher balance to open ($10K+).

Liquidity:

A business merchant account will improve your business liquidity. Banks will process transactions faster, which helps to manage cash flow, orders, and potential refunds. This account offers more flexibility for payment methods (for example, many stores don’t accept debit cards).

Along with international card processing, you’re reducing sales friction.

Without these merchant features, a business account is just a financial planner. Manage taxes better, separate business from personal expenses, and maybe get priority customer support.

Variations:

Different Types Of Savings Accounts (By Specialty)

Children Bank Accounts

Wouldn’t it be great to compound interest since your first birthday? Even $1000 would be enough to retire early, and there are accounts designed for that. As a parent, you can open a children’s account and earn free compound interest.

Until they reach the majority age, you control what you deposit and spend on this account. You could avoid taxes by sending income money as a gift. If instead of saving you want to use the funds, there are children checking accounts.

Annual Percentage Yield:

Around 0.55% per year.

Requirements/Limits:

  • Required proof of identity of your child (birth certificate, SSN, proof of address)
  • No maintenance fees apply
  • No limit to how many accounts you can open

Limits aren’t different from standard plans. The restrictions apply to the child, who can’t manage the savings account until the age of majority.

Liquidity:

If you want to invest in your children, it will likely be a savings account, again, limited to six transactions. This limit doesn’t apply for certain withdrawals (ATM, in-person transactions…), although these options may have their own limits (e.g., withdraw $1000 per day from ATM).

When using custodial accounts, the adult manages the fund until the beneficiary reaches the age of majority. The child can still access the funds with permission:

a. Change the account settings in online banking

b. Allow the child to use all the account features up to a dollar limit

c. Require adult verification for every transaction made

Variations:

Student Bank Accounts

Banks make the most money from long-term customers. That’s why students get great deals. Banks help them make money, so when they get high-paying jobs, they keep working together.

While student accounts don’t have the best APY, they offer great flexibility. You can borrow money with no credit score, and you have YEARS to avoids overdraft fees (up to $1K-$3K). What other account has that?

Perhaps the only con is a risk. As college doesn’t guarantee job offers, is it a good idea to lend money to zero-balance students?

Annual Percentage Yield:

Average of 0.40% – 0.50%.

Requirements/Limits:

  • Proof of student status required
  • Minimum deposit of ~$100 (waived if you’re in college already)
  • You must be 18+ years old (16 on certain banks). Some accounts also set a maximum age of around 23 years
  • Student accounts offer flexible overdraft conditions. You pay no fees up to $1000-$3000 for the first 1-3 years
  • Your account upgrades to the standard savings account when you stop being a student

Liquidity:

If you consider the generous overdraft feature, liquidity is excellent. You can keep up with payments without money, and you don’t need a credit score to qualify. Transaction limits depend on your account type (100s for checking, 6 for savings).

Student credit cards may offer 0% APR for 6-21 months, while still offering ~0.50% APY on savings accounts. This means you could borrow the money you don’t need, and when you return it next year, you’ll have earned 0.50%. If you’re wondering about risk, the FDIC insures this amount.

Part of your liquidity is your credit available. A student account allows you to borrow regardless of your score, so you can build that history. When you upgrade to the standard account, you may get further bonuses as a long-term customer.

Variations:

Health Savings Accounts (HSAs)

Pretty much everything is taxable unless you’re investing in government securities or HSAs.

Like retirement plans, Health Savings Accounts have no upfront taxation. The selling point is tax-free purchases. For qualifying expenses, your medical bill appears with a 100% tax discount.

The contribution limit is way lower than on retirement plans (not viable for wealth creation). But if you qualify, then why not invest as much as possible anyway?

Annual Percentage Yield:

It’s 0.20% APY for a $25K+ balance, 0.10% when above $5K, and 0.02% for lower amounts. This interest is tax-free.

Requirements/Limits:

  • No minimum balance is required to earn interest
  • You qualify if you’re not receiving any other medical benefits
  • To qualify, you need to have a high-deductible health insurance plan
  • A maximum annual contribution of 6,900 tax-free dollars ($13,800 for couples)
  • If you spend these funds on non-qualifying expenses, the IRS will tax your savings and impose a 20% penalty fee
  • In 2021, you can contribute up to $3650 until April next year ($7300 as a family)

Liquidity:

You’re free to withdraw HSA funds via ATMs, transfers, and cards. But not for free. Ineligible transactions carry a 20% penalty, and if it’s income, it appears on your tax bill.

If it’s eligible, you pay no taxes both when depositing and spending. The penalty doesn’t apply for account holders over 65, but it’s still taxable if it doesn’t qualify.

Variations:

FAQ

Q: What type of bank account will allow me to beat inflation?

So you want to beat the annual inflation rate of ~3%. When the highest APR you’ll find is 1-2%. How does that work?

Two ways to do it:

a. Compound interest (APY, not APR). In practice, the 1-2% rate increases over time as your interest earns more interest.

b. Inflation-free securities: You can store your money on Treasury securities (bonds usually), which are inflation-protected and tax-exempt. Or keep it on penalty-free inflation-protected CDs.

At some point, you need to compare the risk of inflation with the risk of investing. That’s where you’ll make the best returns. Traditional bank accounts won’t beat inflation, but at least you can max out the APY instead of holding for nothing.

Q: How are some banks offering +10% interest per month?

Many people don’t hear about these “banks” because they don’t last long. Historically, the closest we got to 10% per month was 1982: bonds offering a 15% coupon rate (per year). As for savings accounts, the highest one recorded is ~0.20% APY in 2010, probably higher decades before (excluding high-yield accounts).

You cannot generate 10% per month from lending (unless it’s a payday loan). The “prime bank” has to risk your money on investments, which is why they lock your funds for +3 months. When it’s time to get your money back, you may find withdrawal issues and no profits.

The scam reveals. And for every firm that shuts down, five more appear, whether it’s a bank, trading platform, or HYIP.

You simply cannot yield 10% per month with the same security of a savings bank account.

Different types of bank accounts to avoid

Q: How will my bank accounts be taxed?

There are three tax situations affecting your bank account:

  1. The income you earned this year
  2. Transactions over $10,000
  3. Interest earned from these accounts

The short answer is, you pay 10% to 37% of all your income as ordinary tax (depending on your bracket). As for interest, taxes can be 0%, 15%, or 20% (long-term capital gains tax) if you hold the realized gains for over a year. There are also accounts where you pay tax regardless of the accrued interest (zero-coupon CDs).

There are better ways to hold money tax free:

Every year, your bank will send a 1009-INT showing your annual interest.

If you’re interested in avoiding tax on your savings, consider opening an offshore bank account:

How to open an offshore bank account
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