bank-savingsChoosing a savings account seems like a simple choice, but it can actually be one of the most complicated choices at a bank or credit union.

The reason? Well, savings can mean much more than a simple savings account. A savings account is basically an investment tool with a guaranteed rate of return. You can have a regular savings or basic savings account, an assisted savings account such as a christmas club or vacation club savings account, a money market account, a CD (certificate of deposit account), or an IRA. Of course, there are many options under each of those types of accounts as well.

Many financial institutions tend to be order takers. In other words, they have these products, but they wait for you to tell them what you want. The problem is, you need to know what kind a savings account is best for you. A lot of banks tend to push the product they want you to have. The product that brings in the highest return for them, not necessarily the one that is best for your own situation. Let’s look at the differences in these types of accounts, so you can be prepared to choose the best savings account.

Basic Savings or Regular Savings – The Basic sums this up. This is just an account where you can keep your money and earn a tiny rate of return. There are few restrictions, and it’s easy to access your money if you need it. There are usually no penalties for withdrawal, unless you make more than 6 withdrawals during a month. This can vary from by bank or credit union, so check around.

Club Savings Account – This would be a savings account with a specific short term purpose, such as a Christmas Club Savings Account or a Vacation Club Savings Account. These accounts can feature a higher interest rate, but it’s usually nothing spectacular. These club savings accounts are really designed to help you save up for a special event. You can usually set them up to have money automatically transferred from another account each month to help you save. These accounts may have a minimum deposit requirement and usually require you to maintain a minimum balance. Certainly a decent choice for someone that needs help being diligent with their savings.

Money Market Savings Account – This is basically a savings account that requires a higher minimum balance but also earns you a much higher rate of return. Some of these accounts will offer higher dividends as you put more money into the account. The money in your money market account is still easily accessible, and usually doesn’t require a fee unless you make more than 3 withdrawals during a month. There is almost always a fee if you drop below the minimum balance. The interest rates and fees vary by bank or credit union; you’ll just need to shop around to find the one that works for you. This is a good type of account if you have a large amount of money, where you need access to the funds from time to time, but you also want to earn dividends at a good interest rate. While the interest rate is decent here, it’s not as good as you will see with a certificate of deposit.

CD or Certificate of Deposit – A certificate of deposit is usually a short term savings account where you give up access to your money during that time in order to earn a better rate of return. The interest rate is usually higher than a typical savings account or even a money market account, because the bank or credit union gets to hold onto those funds for a specific period of time, and there are stiff penalties for early withdrawal. You can get great high yield CD rates if you are willing to be without your money for a period of time. Depending on the bank or credit union, you’ll find Certificates that can run as shorts 3 months and as long as 7 years or more. The interest rate on the CD depends on how long you are willing to be without your money. Typically, the longer the certificate, the better the rate, but this is not always the case. A bank or credit union cannot predict where the fed will place the interest rate, so they will tend to be a little more cautious will very long term Certificates. They might actually lose money in the long term if they give too high a rate on a long term CD. Some certificates give you the option to Bump Up the rate once during the term of the certificate, which helps make sure you don’t get penalized for chosing a longer term certificate. Certificates are a great savings account if you have funds you don’t need to access in the immediate future. You might as well earn a good rate of return if the money was just going to sit there.

IRA or Individual Retirement Account – A retirement savings account lets you save without having to pay taxes on the interest you earn. Some IRA accounts are tax deferred, which means you’ll only pay taxes when you use the money at retirement. Some IRA accounts are tax free. There are tremendously stiff penalties if you withdrawal before retirement age, so unless it’s a life or death emergency… don’t touch it once it’s in the account. So is an IRA right for you? Unless you’re independently wealthy, you need to be saving for retirement. The earlier you start saving the better. Most financial planners will advise you to start saving around age 18. If you put $2,000 per year into an IRA each year until retirement, you should be set. If you want until age 30 to start, you will only have about half the amount by retirement age. Some IRAs have annual contribution limits.

Traditional IRA – Money is deposited pre-tax and the tax is deferred until you withdrawal the money at retirement.

Simple IRA – An employer retirement savings plan. Both employee and employer can make contributions. There are contribution limits.

Self Directed IRA – It’s a retirement plan where the account holder can make contributions.

Roth IRA – You make contributions to your IRA, but with money that has already been taxed. There’s no tax on the account, you can withdrawal without taxes too.

SEP IRA – Your employer can make contributions to your IRA in place of using a pension fund.