What are deposit accounts?

Learn how this type of account works and how to choose one

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A deposit account is a banking product that allows you to store and access your money safely. Four common types of deposit accounts are checking accounts, savings accounts, money market accounts and certificates of deposit (CDs). Deposit accounts are eligible to earn interest and are protected by deposit insurance, making them a good, low-risk place to park your money.


Key insights

Deposit accounts with Federal Deposit Insurance Corporation-insured banks and National Credit Union Administration-insured credit unions are a safe place to store your money because they’re backed by government deposit insurance.

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The four primary types of deposit accounts are checking accounts, savings accounts, money market accounts and certificates of deposit (CDs).

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Good alternatives to deposit accounts include individual retirement accounts (IRAs) and Treasury marketable securities.

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What is a deposit account?

A deposit account is a product offered by a bank or credit union that allows you to store and use your money safely. Deposit accounts include transaction accounts, like checking accounts, that allow you to add and withdraw money on demand. They also include nontransaction accounts, such as savings accounts and CDs, where you can store funds securely for future use.

Deposit accounts are considered a safe place to store your money when they’re opened at banks and credit unions backed by government-provided deposit insurance. The FDIC provides deposit insurance for banks, while the NCUA provides deposit insurance for credit unions.

When you open a deposit account at an FDIC-insured bank or NCUA-insured credit union, at least $250,000 of your total deposits with the financial institution are protected from losses. This helps make deposit accounts a safe and secure place to store your funds.

Types of deposit accounts

Most depository institutions offer four primary types of deposit accounts: checking accounts, savings accounts, money market accounts and CDs. These deposit accounts are all protected by deposit insurance when held at FDIC-insured banks and NCUA-insured credit unions.

While most banks and credit unions offer these account types, the account names may vary. For example, time deposit accounts are usually called CDs at banks and share certificates at credit unions.

Checking accounts

Checking accounts are the most basic deposit account type. You might also hear them referred to as demand deposit accounts, since you can access your funds on demand. Also, credit unions sometimes refer to them as share draft accounts.

A checking account is a demand deposit account that allows you to withdraw or deposit money easily. You can open a checking account with nearly any deposit amount, and it usually offers unlimited (or virtually unlimited) deposits and withdrawals. You can access your money by writing checks, using a debit card, visiting an ATM or branch and going online.

“Checking accounts are more than just a place to keep your money in an accessible account — they typically offer other services as a part of having an account with that institution, like access to credit score and special merchant offers, plus are used for day-to-day cash deposits and withdrawals,” said Steve Goodman, the head of product for consumer banking at JPMorgan Chase.

The ease of access to your money makes checking accounts the deposit account of choice for day-to-day transactions. Depending on your checking account, you may or may not earn interest on your money. Interest-bearing checking accounts often carry lower rates than savings accounts. However, in exchange, you get easy access to your money.

In addition, some financial institutions charge fees for their checking accounts. For example, you may need to pay a fee if you don’t maintain a minimum balance. Or, you may need to process a certain number or type of transactions to avoid fees, such as having at least one direct deposit into your account each month.

“There are different types of checking accounts, including student accounts, so be sure to learn more about the account options to help maximize its full benefits,” Goodman said.

» LEARN MORE: What is a demand deposit account (DDA)?

Pros

  • Unlimited number of transactions
  • Easy access to funds
  • Start an account with zero to low amounts

Cons

  • Associated fees might apply
  • Checking accounts earn low to no interest

Savings accounts

The primary goal of a savings account is to give you a place to store the money you’ve chosen to save. If you open a savings account with an FDIC-insured bank or NCUA-insured credit union, at least $250,000 of your money is protected by deposit insurance. While this is true of all four types of deposit accounts, it’s still worth noting.

There’s no fixed term attached to a savings account, like there is with a CD, so you can access your money whenever you want. However, some financial institutions limit the number of transfers or withdrawals you can make each month (e.g., no more than six).

It’s less expensive for financial institutions to give you a savings account, since transactions are limited. Plus, given the account’s nature, you’re expected to keep most of the funds on deposit. In exchange, you’ll typically earn a higher interest rate on a savings account than on a checking account.

That said, savings accounts are not always the best option if your goal is to earn interest on your savings. If you don’t need ready access to your funds, you’ll often earn a higher interest rate with a CD. Conversely, a money market account might be better if you’d like to earn more interest than a checking account but also want to write checks or use a debit card.

» MORE: Checking vs. savings account: What’s the difference?

Pros

  • Access funds whenever you want
  • Earn higher interest than checking accounts
  • Savings accounts covered by deposit insurance are safe

Cons

  • Not as high-yielding as a CD
  • Limited number of monthly transactions
  • Slightly more work to access funds than a checking account

Money market accounts

A money market account is similar to a savings account and includes some features common to a checking account. As with a savings account, the number of transactions you can conduct each month might be limited (e.g., up to six transfers). As with a checking account, you might be able to write checks against your money market account or use a debit card.

You’ll typically earn a higher interest rate on a money market account than on a savings or checking account. However, a higher minimum account balance (e.g., $1,000) may be required to open the account or avoid fees.

Like a checking and savings account, you can access your funds whenever you want, as they’re not locked in for a fixed term. This makes a money market account more convenient than a CD if you want ready access to your money. However, the rate you earn may be less than a CD to compensate for this convenience.

Pros

  • Interest earnings are typically higher
  • Easy access to funds
  • No fixed term

Cons

  • High minimum to open account
  • Limited monthly transactions
  • CDs might earn a higher rate

Certificates of deposit (CDs)

Certificates of deposits are a type of time deposit account where you agree to keep your money on deposit with the financial institution for a set period in exchange for a fixed interest rate. You may need to meet a minimum deposit requirement (e.g., $500, $1,000) to open the account. Notably, many credit unions call these accounts share certificates instead of CDs.

Unlike the other three types of deposit accounts (checking, savings and money market accounts), you usually can’t access your funds once you’ve opened a CD. If you need to withdraw money before the term expires, you’ll pay an early withdrawal penalty. While this penalty varies, it often represents some of the foregone interest you would have earned on the account (e.g., three months’ worth).

The other key difference between CDs and the other deposit account types is you’ll earn a fixed interest rate that won’t change during the term. This makes it easy to predict how much interest you’ll earn. By contrast, the other accounts have variable rates that increase or decrease with market changes.

While a fixed interest rate is excellent as far as predictability is concerned, in a period of rising interest rates and high inflation, you might earn a lower-than-market rate (and vice versa). You can combat this potential risk by choosing shorter CD terms or by setting up multiple CDs with staggered maturities (known as CD laddering).

» MORE: CDs vs. savings accounts: Which is right for you?

Pros

  • Fixed rate and predictable earnings
  • Can earn higher-than-market rate (during periods of low inflation)
  • Higher interest rates than other accounts

Cons

  • Minimum deposit required for account
  • Risk of earning lower-than-market rate (during periods of high inflation)
  • Cannot withdraw funds before maturity date

How to choose a deposit account

When deciding which deposit account to choose, consider these factors:

  • Why you need the account: A checking account makes sense if you simply want to process day-to-day transactions. If you’re building emergency funds, savings or money market accounts are better.
  • How frequently you want to access the funds: If you want to access your funds on a day-to-day basis, then a checking account is likely the best option. A money market or savings account is better if you only need to access the funds occasionally. For funds you only rarely need to access, you might choose a CD.
  • What interest rate you’ll earn: In cases where you aren’t going to keep large balances in your account at all times, like a checking account, the interest rate might not matter. Otherwise, search for an account that pays the best rate. Savings accounts often pay lower rates than money market accounts, and CDs often pay better rates than both.
  • How much you’ll pay in fees: Sometimes, deposit accounts are free if you maintain a minimum balance (e.g., $1,000) or process certain types of transactions (e.g., you set up a monthly direct deposit). In other cases, you might pay fees if you process too many transactions or don’t meet a monthly balance amount.
  • Minimum deposit requirements: Before selecting an account, find out if you need to make or maintain a minimum deposit to open the account or avoid fees. If you don’t think you can meet these requirements, then you’re better off selecting a different account.
  • The characteristics of the financial institution: The safest deposit accounts are those held with FDIC-insured banks and NCUA-insured credit unions, since at least $250,000 of your deposits are protected by deposit insurance. Additionally, consider the ease of doing business with the institution and the types of accounts it offers.

“Choosing the best account entirely depends on your plans for the money you are depositing,” said Gates Little, president of The Southern Bank Company, a full-service bank in Gadsden, Alabama. “Do you want unlimited withdrawals or are you trying to maximize your savings? If you want access to your deposits with zero limitations, a checking account is probably best. If you want some incentive to keep your money untouched when saving for a financial goal, a savings account or CD account could be better options.”

How to open a deposit account

The first step to opening a deposit account is to search for a financial institution. The safest choice is an FDIC-insured bank or NCUA-insured credit union.

Once you’ve selected a bank or credit union, the next step is to apply to open an account. Depending on the financial institution, you can submit this application online or in person at a branch.

Regardless of where you apply, you’ll need to provide personal information (e.g., full legal name, birthdate, Social Security number, address) and proof of your identity (e.g., government-issued photo identification card).

After verifying your identity, the financial institution will open the account, give you the account details and provide instructions for making an opening deposit.

The final steps are to fund your account and start using it. You can usually fund your account by depositing a check from another account, transferring funds electronically or even depositing cash. If you want to access the funds via check or a debit card, you’ll want to order these right away.

Alternatives to deposit accounts

While deposit accounts with banks and credit unions are some of the safest places to store your money, you might want to consider an alternative in some cases. Two alternatives to deposit accounts that are also relatively safe are:

  • IRAs: An individual retirement account (IRA) is a type of retirement account you can contribute to each year. Unlike a retirement plan offered by an employer, you own an IRA and can keep contributing to it even if you change jobs. While IRAs can lose value depending on what investments they include, they can be a good CD alternative when saving for retirement because of potential tax advantages.
  • Treasury marketable securities: These are commonly referred to as “Treasurys.” They are a type of investment backed by the full faith and credit of the U.S. that are considered very safe. As with a CD, you can buy Treasurys for a set term and in return receive a fixed rate. As such, they are good CD alternatives if you want a safe place to store your money and don’t want to keep all of your money in a bank account.

Daniel Colston, a certified financial planner and CEO of Upward Financial Planning in Roanoke, Virginia, notes the importance of thinking about the type of account you choose in the context of your overall financial plan. “When it comes to saving for one's retirement and financial independence, using … [deposit accounts] would be a horrible choice, but when it comes to saving for a new car purchase in a few months … deposit accounts may be right,” he said.

While deposit accounts are a safe place to store your money, you’ll earn a lower rate of return over the long term than with an alternative, like an IRA.

“In any scenario, considering all options available and their associated fees, interest rates and ancillary services is key to making a good decision,” Colston said.

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FAQ

What is the average interest rate for a deposit account?

According to data published by the FDIC, the average interest rate at the time of publishing is 0.06% for interest-bearing checking accounts, 0.35% for savings accounts, 0.48% for money market accounts and 1.36% for a 12-month CD.

Keep in mind that interest rates on deposit accounts change frequently with market conditions, so do your research to stay up to date on current rates.

Can you lose money in a deposit account?

When you place money in a deposit account with an FDIC-insured bank or an NCUA-insured credit union, the government guarantees at least $250,000 of your deposits with the financial institution. Your deposits up to this amount are protected from losses if the financial institution fails.

Besides protection from deposit insurance, nearly all deposit accounts have returns based solely on interest paid by the bank. As a result, you can’t lose the money you deposit.

Is interest earned on a deposit account taxable?

Interest earned on deposit accounts like checking accounts, savings accounts, money market accounts and CDs is taxable. You must report all interest earnings on these accounts in your tax return. You’ll receive IRS Form 1099-INT to include with your tax return if you earn interest of $10 or more on the account during the year.

Bottom line

There are multiple types of deposit accounts you can use, and they’re offered by many reputable financial institutions, including banks and credit unions. Before opening a deposit account, consider how you plan to use the money and your savings goals.

At the most basic level, everyone can benefit from a checking and savings account. Checking accounts allow you to manage day-to-day transactions, like depositing your employment checks and paying bills. Savings accounts allow you to set money aside for any purpose, such as building an emergency fund.

Regardless of the deposit account you choose, if you open one at an FDIC-insured bank or an NCUA-insured credit union, at least $250,000 of your deposits are backed by deposit insurance. This makes deposit accounts one of the safest places to store your money.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Consumer Financial Protection Bureau, "What is a money market account?" Accessed Feb. 15, 2023.
  2. Consumer Financial Protection Bureau, “What is the difference between a checking account, a demand deposit account, and a NOW (negotiable order of withdrawal) account?” Accessed Feb. 9, 2023.
  3. Federal Deposit Insurance Corporation, "Are My Deposit Accounts Insured by the FDIC?" Accessed Feb. 15, 2023.
  4. Federal Deposit Insurance Corporation, "National Rates and Rate Caps." Accessed Feb. 9, 2023.
  5. Federal Deposit Insurance Corporation, "Deposit Accounts." Accessed Feb. 15, 2023.
  6. IRS, "Individual Retirement Arrangements (IRAs)." Accessed Feb. 15, 2023.
  7. IRS, "Topic No. 403 Interest Received." Accessed Feb. 9, 2023.
  8. National Credit Union Administration, "Share Insurance Estimator." Accessed Feb. 15, 2023.
  9. Office of the Comptroller of the Currency, "What is an index-linked certificate of deposit (CD)?" Accessed Feb. 9, 2023.
  10. TreasuryDirect.gov, "About Treasury Marketable Securities." Accessed Feb. 15, 2023.
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