There are many different accounts where you can place your money, but what do they all mean and how can you use them to your advantage?
Types of bank accounts
Checking account
Your checking account is a foundational piece of your financial puzzle. This is your transactional account that in the past was often referred to as your “paying and receiving” account. This is home base, the account where you receive your paycheck and pay your household bills. This account gives you a home base for your income and an opportunity to track your expenses in one place. You can deposit money and then easily access it. You can make withdrawals from this account, set up automatic transfers to savings accounts and create automatic bill pay.
Savings account
The next foundational account in your financial arsenal is a savings account. This account can be linked to your checking account and receive automatic deposits, earn interest on the money kept in the account and used to help you pay for an emergency or financial goal. When you open a savings account, the goal is to let the money sit here and grow through your contributions so you can earn interest on the account. One of the typically differences between a general savings account and a money
Money market
A money market account is a unique account that allows you to save funds at a competitive interest rate with multiple ways to access your funds. You can earn interest on your deposits and pull money directly from this account to pay expenses.
Time deposit
A time deposit or certificate of deposit (CDs) is a savings account that locks your money down for a certain time period. This means you can’t access the funds for a certain amount of months, or you will have to pay a penalty fee. Interest rates tend to be slightly higher on time deposits, but can be a great tool if you know you won’t need those funds for several months.
Health savings account (HSA)
An HSA is an individually owned, tax-advantaged[1] account that may be used to pay for qualified medical expenses or to save for retirement and long-term care expenses. In 2023, the maximum contribution amount for HSAs is $3,850 for individuals and $7,750 for family coverage. If you are 55 or older, you can also contribute an extra $1,000 at the end of the year.
Many employers offer a matching contribution for health savings accounts. In addition, even though this account is established as an employee benefit, you are the individual owner of the account and retain access to it if you change employers.
Investment accounts
If you are looking for another opportunity to deposit your money that comes with a few more restrictions and opportunities, then an investment account might be up your alley. There are many different types of accounts, and the best option is the type of account that helps you achieve your financial goals.
Retirement account
There are several retirement vehicles, and each offers its own unique tax benefits and incentives. Two of these options include an individual retirement account (IRA) and 401(k).
An IRA, whether Roth or traditional, is a savings mechanism that allows you to invest funds for your future retirement. The sooner you begin putting money into an IRA, the more time your money has to grow before you reach 72, the age at which you are required to begin taking distributions from the account. IRAs prepare you for retirement and provide tax advantages, allowing you to choose whether to make contributions tax-free (traditional) or receive your distributions tax-free (Roth).
Unlike an IRA, a 401(k) is a tax-deferred retirement savings account that employers offer their employees. Employees contribute money to their account via elective salary deferrals, meaning a percentage of their salary is withheld and contributed to the 401(k). Oftentimes, employers will match employee contributions up to a certain limit or percentage as an added employer benefit. Be mindful of employer match contributions to ensure you are receiving the maximum match contribution.
529 account
A 529 account can be used to save money for educational expenses for a loved one. This can be a great option if you would like to pay for private primary school or support loved ones working on an advanced degree. These funds work like a retirement account where you can make deposits and select funds to further invest the money and earn additional funds. However, a 529 account has different requirements for how the money can be used. Be sure to talk with your financial advisor to ensure you are comfortable with all the ins and outs of this type of account.
Brokerage account
A brokerage account consists of stocks, bonds or mutual funds. These accounts can help you earn a return on the money that you deposit; however, they each come with a different amount of risk. You will want to explore options with a financial advisor to investigate your risk tolerance.
Earn interest on your deposits
If you would like to make your money work for you and earn interest while you save, there are a few different accounts that you can explore. As you start your research, the first thing to ask yourself is how much risk you are willing to assume. For example, a high-yield savings account is going to have a different risk profile than an investment account.
A financial advisor can help you review options specific to your unique needs and goals to determine where you can place your deposits to earn the most passive income.
Account opportunities:
- Savings account
- Money market
- Time deposit
- Retirement account
- 529 account
- Investment account
- Health savings account
Insuring your deposits
Many banks work with the Federal Deposit Insurance Corporation‡ (FDIC) to insure your deposits. Your financial partner should readily disclose if they have FDIC insurance for your deposits. The FDIC insures up to $250,000 at a single institution. There are different tools‡ you can use to calculate if your deposits are insured. The best thing you can do is talk with your financial partner to understand how to best to divvy up your deposits to keep them insured and to support your financial goals.
Opening the right account
Now that you’ve reviewed your options, how do you decide where to place your money? This all depends on your goals. To start, establish what you are trying to accomplish. Would you like to save for a large purchase or a vacation? Or maybe you want to start saving for retirement or higher education. Your goal determines which account should house your money for you.
A personal banker can help you determine which account is best for your depending on your overall financial strategy and goals.
UMB personal banking solutions are here to support you through every step of your financial journey. From checking accounts to home and auto loans, UMB will build a relationship with you and empower you to find the right products to help you achieve your financial goals.
[1] UMB Bank, n.a. is not a tax advisor and does not offer tax advice. If you have questions about your tax implications, consult your tax advisor or visit irs.gov more additional information.
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