What Is A Savings Account, How Does It Work, And The Types Of Savings Accounts

Shawn Plummer

CEO, The Annuity Expert

What Is A Savings Account

A savings account is a financial account typically offered by banks and credit unions, designed for individuals to save money. It allows you to deposit funds, earn interest on your balance, and withdraw money within certain limits. Savings accounts are generally considered safe and liquid (easy to access) compared to other forms of investment. They are ideal for short-term savings goals or as an emergency fund due to their lower risk and easy accessibility. The interest rates on savings accounts are usually lower than those on investments like stocks or bonds but offer more stability and less risk.

How Does A Savings Account Work

A savings account works by providing a secure place for you to store your money while earning interest. Here’s how it typically operates:

  1. Opening an Account: You open an account with a bank or credit union, depositing an initial amount of money.
  2. Depositing Money: You can add money to your account through various methods like direct deposit, transferring from other accounts, or depositing checks and cash.
  3. Earning Interest: The bank pays you interest on the balance in your account. The interest rate is usually modest and can be calculated on a monthly or yearly basis.
  4. Withdrawing Funds: You can withdraw money from your savings account, but there may be limits on the number of withdrawals you can make each month without incurring fees.
  5. Access and Management: You can typically access and manage your savings account online, through mobile apps, or at a bank branch.
  6. Safety and Insurance: Savings accounts are generally safe as they are insured up to certain limits by government-backed agencies like the FDIC in the United States.

The account is best used for short-term financial goals, emergency funds, or just as a secure place to accumulate savings.

Tax Free Savings Accounts

Types Of Savings Accounts

Taxable Savings Accounts

Traditional Savings Accounts: These are the steady eddies of the savings world. You deposit your money, and it earns interest over time. But remember, Uncle Sam considers this interest as income, so it’s taxable.

Money Market Accounts: Think of these as traditional savings accounts’ more adventurous siblings. They offer higher interest rates, but the taxman still gets a piece of that extra earning.

Certificates of Deposit (CDs): CDs are like time capsules for your money. You lock away your funds for a set period, and in return, you get a fixed interest rate. But when you open the capsule, the earnings are taxable.

Dividend-paying Stocks and Bonds: These are the go-getters of the investment world, potentially offering higher returns. Dividends and interest earned here are subject to taxes but often at a lower rate for long-term investments.

Tax-Free Savings Accounts

Roth IRAs: Imagine a financial container where you put in taxed money, and it grows without ever being taxed again. That’s a Roth IRA for you. It’s a gift that keeps on giving, especially in retirement.

Health Savings Accounts (HSAs): These are like health-focused piggy banks. You contribute pre-tax dollars, which can grow and be used for medical expenses tax-free. It’s a triple tax-advantaged wonder.

529 College Savings Plans: Saving for education? 529 Plans are your financial study buddies. Your contributions grow tax-free, and when it’s time for school, the withdrawals for tuition and other expenses are tax-free, too.

Municipal Bonds: These are the community helpers of the savings world. Issued by local governments, they fund public projects, and the interest you earn is usually tax-free.

Which Savings Accounts Are Taxable And Which Are Tax-Free?

Unique Savings Account Types

  • Share Savings Account: Offered by credit unions, providing ownership and dividends​​.
  • Fixed Interest Savings Account: Offers a set interest rate for a specified period, ideal for predictable savings​​.
  • Instant Access Savings Account: Provides easy access to funds, suitable for short-term goals and emergencies​
  • Locked Savings Account: Restricts access to funds for a set period, often offering higher interest rates​​.
  • Joint Savings Account: Designed for multiple users, promoting financial transparency and shared goals​​.
  • Custodial Savings Account: It is opened by a parent or guardian for a minor to save and grow funds until the minor reaches a designated age.
  • Medical Savings Account: Tax-exempt account you can set up exclusively for medical expenses.

Earn The Highest Interest Rates On Savings Today

Fixed annuities are almost identical to Certificates of Deposit (CDs) accounts and provide higher interest rates and penalty-free withdrawals for income.

TermInsurance CompanyAPY
N/AMoney Market Account – Generations Bank5.29%
N/AMoney Market Account – Ponce Bank5.28%
N/ASavings Account – Customers Bank5.30%
12 MonthsCD – Western Alliance5.51%
5 YearsClear Spring Fixed Annuity6.00%
*Fixed annuities are only for saving money to use in retirement.

Disclaimer: This is a review. The Annuity Expert is not associated with a bank or credit union. However, fixed annuities are sold at most financial institutions. We aim to help you find the highest interest rates for your retirement savings. We may receive a small referral fee if you purchase something using a link in this guide.

Find And Compare The Highest Interest Rates

Find the highest interest rates for your savings, ranging from 3 months to 5 years, all in one place.

Making the Right Choice for You

When choosing a savings account, consider your financial goals and risk tolerance. Do you want a safe harbor for your funds, or are you willing to ride the waves for potentially higher returns? Also, weigh the tax implications – sometimes, a lower interest rate that’s tax-free can outperform a taxable account with a higher rate.

Savings Account Comparison

Account TypeInterestRisk LevelTax ImplicationBest For
Traditional SavingsLowLowTaxableEmergency funds
Money MarketModerateLowTaxableHigher savings yield
CDsFixedLowTaxableGuaranteed returns
Stocks/BondsVariableHighTaxableGrowth potential
Roth IRAVariableVariesTax-FreeRetirement savings
HSAVariableLowTax-FreeHealth expenses
529 PlanVariableLowTax-FreeEducation funding
Municipal BondsLowLowTax-FreePublic good investment
Taxable Savings Accounts

Next Steps

Understanding the differences between taxable and tax-free savings accounts is crucial in making informed decisions about where to save and invest your money. You can choose the proper savings account to help you reach your financial objectives by considering your financial goals, risk tolerance, and tax implications. By staying informed and making intelligent financial decisions, you’ll be well on your way to achieving financial security and prosperity.

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frequently Asked Questions

How much money can you have in your savings account without being taxed?

The federal government taxes savings account interest as income, and any earnings above $10 must be declared to the IRS on a 1099-INT form. Your bank or other financial institution must supply you with this information.

What is the $3000 rule?

Financial institutions must ensure the legitimacy of any customer purchasing money orders, bank checks, cashier’s checks, and traveler’s checks worth more than $3,000 by verifying and recording their identity.

Does the IRS know if you have a savings account?

Absolutely. It’s likely that the IRS is already aware of several of your financial accounts and can quickly access information about their corresponding balances.

Can the IRS take your savings account?

Don’t let unpaid taxes get the best of you; An IRS levy grants the government permission to take away your assets to settle an outstanding tax debt. Wages, bank account funds, and even vehicles may be seized without notice if a levy is placed on them – leaving only real estate or other possessions within reach from being taken by force.

What bank account can the IRS not touch?

No matter your bank account type, the IRS can access it.

Can you overdraft a savings account?

Attempting to overdraft a savings account typically results in the transaction being declined, as these accounts are not designed for frequent withdrawals or overdrafts

How do you close a savings account?

To close a savings account, you typically need to contact your bank, either in person, online, or by phone, and request an account closure. Any remaining balance must be withdrawn or transferred.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed insurance agent and annuity broker with over a decade of first-hand experience. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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