Just a quick intro
Regular savings accounts: A regular savings account will earn you interest and will offer you quick access to your funds
Money market accounts: This kind of account will earn more interest than a regular savings account (usually!), but you will have higher balance requirements to grapple with in exchange for the pleasure of higher interest. Many of these accounts also have check-writing privileges and ATM access.
COD accounts (Certificate of Deposit): CODs usually offer the highest interest rate of them all. However, they also usually have the most limited access to your funds of them all.
Picking a savings account right for you
A plain old regular savings account might be the one for you. It earns interest and provides extremely easy access to your money. However, you will want a checking account for your day-to-day spending. Per federal regulation, you can withdraw or transfer money from a savings accounts up to six times per month. In-person requests at bank branches, however, are without caps.
A Money Market Account generally offer better rates, but it also has a higher balance requirement. In other words, in exchange for the privilege of having higher interest, you best be making dough — and keeping it in your account. We’re talking, typically, $1,000 or more to avoid monthly penalties. Unlike a typical savings account, a Money Market Account might offer customers the ability to withdraw money with a check or debit card (although you will still have a six per month limit).
A COD (or Certificate of Deposit) account will offer the highest rate of interest, but will also “offer” the most limited access to your funds. In return for the high interest, there is a catch. The catch is that you cannot withdraw any money from your COD for a predetermined amount of time (also known as a “term”). If you take your money out earlier, you will incur a stiff fee. The longer term you agree to, the higher the interest. Terms most often last anywhere between six months and five years. Higher rates also are offered for large deposits.
Two retirement accounts you should know about
Your simple 401(k) plan
You should definitely know about this account because it might just be the difference between getting to have a retirement and not having a retirement. 401(k)s are employer-sponsored deferred-income plans. To invest money in your 401(k), the employee must parcel out a bit of each paycheck (which will then be diverted into the plan). These contributions occur before income taxes are deducted from the paycheck.
Any investment gains realized within this plan are not taxable by the IRS (take that feds!). But when you reach retirement age and begin making withdrawals, that money will, in fact be, taxed by the IRS (sorry about earlier, feds!). Your “distributions” (that’s what this money is called) will be subject to income taxes at a retiree’s current tax rate. The limit for annual contributions, as of 2018, is $18,500 for those under the age of 50. Over 50? You can contribute an additional $6,000.
These plans tend to work out the best for account holders when an employer is “matching” the contributions that they are making. In other words, when an employer is contributing additional money to the employee’s 401(k) account — generally a percentage of the employee’s contribution. Some companies do this. Some do not. Matched contributions cannot exceed $55,000 annually (If over 50, $61,000 annually).
Roth IRAs are a variation of the typical 401(k). The difference is that an individual’s employer is not, in any way, involved or making contributions. In fact, these accounts are set up directly between an employee and the company with which they work. So, in other words, employer-matching is not an option with Roth IRAs. But because the account is the individuals, and not shared by the employer, there are no investment limits. With 401(k)s, usually, the investments you can make are restricted by the “plan provider.” But this is not the case with Roth IRAs, and so Roth accounts have a greater degree of investment freedom.
With Roth IRAs, after-tax money is funding the account right from the beginning, and so the money is not subject to income taxes when it is withdrawn for the account-holder’s retirement needs. In 2018, the maximum annual contribution is $5,00 (or $6,500 for those ages 50 and up). Individuals earning more than $135,000 a year are barred from contributing to these accounts.
Roth accounts make the most sense for those individuals who think they will be in a higher income tax bracket when they retire than they are currently in now. It is better to pay taxes on a smaller percentage of income than to pay a larger percentage of taxes come withdrawal time.
As always, knowledge is power. And all the different savings accounts have their positives and their negatives, too. Make sure to stay informed about the differences, and your finances will be in better hands for it.
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