What are the different types of savings accounts & which makes sense for you?

Saving money is a crucial step toward achieving your financial goals, whether it's a down payment on a house, a dream vacation or a comfortable retirement. But with so many different types of savings accounts available, how do you choose the right one for your needs?

We'll break down the most common types of savings accounts, explaining their key features, benefits and drawbacks. Explore options from traditional savings accounts to high-yield options, CDs and savings bonds. By understanding the nuances of each account, you can make informed decisions and maximize your savings potential.

Saving accounts can be compared by their convenience, liquidity and the amount of interest they pay. Although you can make general comparisons by account type, details often differ among financial institutions. Remember, you don't have to choose just one. It may make sense to have multiple savings accounts depending on your needs. Also, consider timing when choosing a savings account. Rates fluctuate, and choosing the right moment can make all the difference.

Banks and credit unions offer classic savings accounts that many people open alongside a checking account. Although they do pay interest, the rate you earn is typically lower than you can get on other types of savings accounts. Traditional savings accounts are common because people often have an established banking relationship and value the convenience and security of keeping their money at an insured financial institution. Your money is easily accessible, with most savings accounts allowing you to make several or even unlimited withdrawals per month without charging a penalty.

• Best for: People who prefer convenience over finding the best rate
• Pros: Convenient, usually cost- and risk-free way to save while keeping easy access to your money
• Cons: Interest rates are usually low compared to other options

High-yield savings accounts are very similar to traditional savings accounts, but as the name suggests, they pay higher rates. Although you may find them at traditional banks and credit unions, you are more likely to find them at online banks. If you want to maximize the amount of interest you receive for your savings and don't mind banking online to get a higher rate, then a high-yield account may be a good option.

• Best for: People who want to maximize the interest rate they earn and aren't as concerned about having access to a physical bank location
• Pros: Pays higher rates than traditional savings accounts, typically offers unlimited access to your savings with lower fees
• Cons: May not be offered by your local bank, may have limited ATM access depending on the institution

Money market accounts are available at most banks and credit unions, including online. What sets them apart from other types of savings accounts is they typically provide the same access to your money as a checking account. You'll usually earn higher interest rates compared to a high-yield savings account as well. To receive those benefits, however, you may be required to keep a higher minimum balance or pay monthly fees.

• Best for: People who want a higher interest rate without giving up easy access to their money and can afford to maintain a higher minimum balance
• Pros: Pays a higher rate than traditional savings while still having access to your money
• Cons: Usually requires keeping a higher minimum balance, may charge a monthly fee, may limit how many penalty-free withdrawals you can make

CDs work a little differently than savings accounts. They are a type of time deposit, meaning you must agree to deposit your money for a specified period such as six months, a year or more. In return, the bank will pay you a higher rate of interest. Generally, CDs with longer time frames, or maturities, pay higher interest rates. Because they require you to tie your money up until the maturity date, they are better for longer-term savings situations when liquidity isn't as important as earning a better rate.

• Best for: People who won't need to withdraw money before the maturity date
• Pros: Usually pays higher interest than savings accounts, can generally find maturity terms to match your savings time frame
• Cons: Charges fees and penalties for early withdrawal or closure, providing less flexibility than other types of savings

Savings bonds are similar to CDs in that they have a fixed maturity of varying lengths, but they are issued by the federal government rather than banks. Because they are issued by the government, they are considered to be one of the safest form of savings.

The two types of savings bonds are Series EE bonds, which pay a fixed rate of interest for the entire term, and Series I bonds, which pay a rate that adjusts every six months for inflation.

The interest you receive from savings bonds is exempt from state and local taxes, making them particularly attractive for savers who live in states with high income tax rates. You do not receive your interest as regular payments along the way. Instead, you receive all of the interest in one lump sum at maturity.

• Best for: Long-term savers who prioritize safety
• Pros: Backed by the federal government, interest is exempt from state income tax
• Cons: May pay lower rates than other time-based savings vehicles, early withdrawals are subject to penalty

Cash management accounts are offered by brokerage firms and other nonbank financial institutions. They are intended to provide you with a means to manage your cash, along with your investment accounts, all in one place. They usually offer a combination of savings and checking features such as check writing and ATM access, and often pay a higher rate than traditional savings.

• Best for: People who have money at a brokerage firm and want to keep their cash at the same institution
• Pros: Convenient way to manage all of your money in one place, easy access to your money
• Cons: Typically only available online, may have higher account minimums than traditional savings

How are interest-bearing accounts taxed?

The way accounts credit interest results in when you pay taxes on the earnings.

Read more

As you think about which type of savings account is best for you and your overall financial strategy, it's important to consider your savings goals and understand how specific account features may fit within your bigger plan. Major factors to consider include how accessible your money is, when you'll need it and the amount of growth you expect.

Liquidity refers to how quickly and easily you can get your money. Traditional savings accounts as well as high-yield savings and money markets are highly liquid and generally allow you to withdraw your money as needed. This makes them better for short- to mid-term goals like buying a car, putting a down payment on a house or saving for an emergency. But if you don't need access to your money in the near future, you might consider less liquid options that have more growth potential, such as a certificate of deposit, Treasury bills, government bonds or mutual funds.

Consider how much time you have to reach your goals. If you're saving for a vacation, a wedding, new appliances or another major purchase within a few months or a year, you'll want to put your money somewhere that has the most stable growth potential for that time frame. For example, you'll probably want an interest-based savings account that will give you a predictable return by a certain date rather than trying to time the stock market. The same is true for goals that don't have specific time frame, like having an emergency savings.

If, however, you have mid- to long-term goals that are a long way off before you need the money—saving for a dream house, higher education or the trip of a lifetime—you can look for savings options that may reward you more for letting your money sit untouched.

Savings accounts typically pay interest with no or little risk of loss of your deposit. You put money in an account and periodically earn interest at the advertised rate—which can be fixed or variable, depending on the type of account you choose. If you leave the money in the account, your interest can compound so that you're earning money on the growth as well as your deposit. Interest rates change over time, so to make the most of your funds, monitor the rates offered on different accounts regularly.

Even with a great interest rate, savings and certificate of deposit rates generally won't grow as much as investments that have some risk of losing what you put into them. For long-term goals like retirement or education savings, you're better off using special-purpose accounts like 401(k)s, IRAs and 529 plans. They're less liquid and involve a risk of market loss, but the longer time horizon means greater growth potential and time to recover from losses.

Savings accounts aren't the only easy-access option you have for setting aside money. Other accounts also can provide you with liquidity while you grow your money.

Investment options like mutual funds give you the ability to diversify your savings among a larger number of securities than you might be able to individually. Rather than buying a single bond, you buy into a bond fund, giving you instant exposure to thousands of different bonds with varying maturities and interest rates. And because mutual funds trade on the stock exchange, you don't have to wait for the individual bonds to mature. You can sell them at any time without penalty.

Investment accounts also can be fairly liquid. You can withdraw from them as often as you need to, but there may be a time delay as you wait to sell certain securities. Although these accounts are typically better suited to long-term investment vehicles like stocks, it's often a good idea to hold a portion of your investment portfolio in cash.

Each type of savings account presents a unique set of benefits and trade-offs. Understanding how each account's features relate to your individual needs and preferences can help you design a long-term financial plan that aims to make the most of your money. Contact a Thrivent financial advisor for help comparing the options and choosing the account that best meets your needs.