Turning Your Money Over to a Financial Institution for Safekeeping

Keeping money in a financial institution provides security, convenience, and potential earnings. Instead of holding cash at home, depositing funds in a bank or credit union protects against theft, loss, and damage while also offering tools for managing expenses and saving for the future.

Before entrusting your money to a financial institution, it’s important to understand the different types of accounts available, how interest works, what protections are in place, and any costs involved.

Basic Requirements

Opening an account requires meeting eligibility criteria and providing documentation. Most banks and credit unions require individuals to be at least 18 years old, though joint or custodial accounts are available for minors. A government-issued ID, such as a driver’s license or passport, is necessary for identity verification. Proof of address, like a utility bill or lease agreement, may also be required to comply with federal regulations.

A Social Security number or Individual Taxpayer Identification Number (ITIN) is needed to report interest earnings to the IRS. Some banks allow non-residents to open accounts using alternative identification but may require additional verification.

A minimum initial deposit is often necessary, varying by institution and account type. Some banks allow accounts to be opened with as little as $25, while others may require $100 or more. Falling below the minimum balance can result in monthly maintenance fees, typically ranging from $5 to $25.

Types of Deposit Accounts

Financial institutions offer various deposit accounts designed for different financial needs. Some facilitate daily transactions, while others focus on savings. Understanding their features helps in selecting the most suitable option.

Checking Accounts

A checking account is used for everyday transactions, such as paying bills, making purchases, and receiving direct deposits. These accounts typically include a debit card, check-writing capabilities, and online banking access. Unlike savings accounts, they generally have no restrictions on withdrawals or transfers.

Banks offer standard, interest-bearing, and premium checking accounts. Some require a minimum balance to avoid maintenance fees. Overdraft protection is available, either by linking to a savings account or through an overdraft line of credit, though overdraft fees can be as high as $35 per transaction.

Checking accounts at banks are insured by the Federal Deposit Insurance Corporation (FDIC), while those at credit unions are covered by the National Credit Union Administration (NCUA), both up to $250,000 per depositor, per institution.

Savings Accounts

A savings account is designed for storing money while earning interest. Some accounts limit withdrawals or transfers, though federal restrictions on these were suspended in 2020.

Interest rates vary widely. Traditional banks often offer rates below 0.50%, while online banks may provide yields exceeding 4.00% as of 2024. Interest earned is taxable, and financial institutions report earnings over $10 to the IRS using Form 1099-INT.

Some savings accounts require a minimum balance to avoid fees. High-yield savings accounts, often offered by online banks, provide better interest rates but may have restrictions on withdrawals or require electronic transfers for deposits. Like checking accounts, savings accounts are insured up to $250,000 per depositor, per institution.

Certificates of Deposit

A Certificate of Deposit (CD) is a time deposit account that offers a fixed interest rate in exchange for keeping funds locked in for a specified period, ranging from a few months to several years. CDs typically offer higher interest rates than savings accounts, with longer terms generally providing better returns.

Early withdrawal from a CD usually results in a penalty, which can be a percentage of interest earned or a set number of months’ worth of interest. Some banks offer no-penalty CDs, allowing early withdrawals without fees, though these often come with lower interest rates.

CDs are insured by the FDIC or NCUA up to $250,000 per depositor, per institution. A laddering strategy—dividing funds into multiple CDs with different maturity dates—can balance liquidity and earnings, ensuring access to funds at regular intervals while still benefiting from higher interest rates.

Interest Rates and Earnings

Interest rates on deposit accounts are influenced by the broader economy, Federal Reserve policy, and competition among banks. When the Federal Reserve adjusts the federal funds rate, banks typically follow suit.

Online banks often provide higher interest rates than traditional banks due to lower operating costs. Credit unions, as member-owned cooperatives, may also offer competitive rates since they return profits to members rather than shareholders.

Interest can be calculated using simple or compound methods. Simple interest is based only on the original deposit, while compound interest allows interest to be earned on both the principal and prior interest. Daily compounding yields the highest returns over time.

Interest earnings are taxable and must be reported to the IRS. Financial institutions issue Form 1099-INT for earnings of $10 or more, and this income is taxed at the account holder’s ordinary income tax rate. While standard deposit accounts do not offer tax advantages, certain accounts, such as Individual Retirement Accounts (IRAs) holding CDs, provide tax-deferred or tax-exempt growth.

Deposit Insurance

Deposit insurance protects account holders from financial loss if a bank or credit union fails. In the U.S., this protection is provided by the FDIC for banks and the NCUA for credit unions. Both entities insure deposits up to $250,000 per depositor, per institution, for each account ownership category.

The FDIC was established in 1933 in response to widespread bank failures during the Great Depression. The NCUA, created in 1970, offers similar protections for credit union members through the National Credit Union Share Insurance Fund (NCUSIF). Not all financial institutions are covered, so depositors should verify that their bank or credit union is federally insured.

Deposit insurance covers checking, savings, money market deposit accounts, and CDs but does not extend to investments such as stocks, bonds, mutual funds, life insurance policies, or annuities, even if purchased through a bank.

Access to Funds

Different account types provide varying levels of liquidity. Checking accounts offer the most flexibility, while CDs impose the most restrictions. Access depends on the institution’s services, including branch locations, ATMs, online banking, and mobile apps.

Most banks provide debit cards linked to checking accounts, allowing for ATM withdrawals and purchases. Some institutions reimburse ATM fees for out-of-network transactions, while others charge fees ranging from $2 to $5 per withdrawal. Online banks often partner with nationwide ATM networks to provide fee-free access.

Mobile banking apps enable electronic transfers, bill payments, and mobile check deposits. For larger withdrawals, wire transfers and cashier’s checks are available, though these services may come with additional costs.

Savings and money market accounts may have withdrawal limits, though federal restrictions on these were lifted. Some banks still impose limits and charge fees for excessive withdrawals. CDs restrict access entirely until maturity, with early withdrawals incurring penalties.

Record-Keeping

Maintaining accurate financial records helps track account activity, manage budgets, and prepare for taxes. Digital banking platforms provide real-time access to account details through online portals and mobile apps.

Monthly statements summarize transactions, including deposits, withdrawals, and fees. Reviewing these statements regularly helps identify errors, unauthorized charges, or fraudulent activity. Many banks offer account alerts via email or text, notifying customers of low balances, large transactions, or suspicious activity.

For tax purposes, banks issue year-end statements summarizing interest earnings, which must be reported to the IRS. Keeping copies of these documents is important for filing accurate tax returns. Some institutions provide digital tools for categorizing transactions and generating spending reports.

Fees and Charges

Deposit accounts often come with fees that can reduce balances over time. Understanding these costs helps in selecting the most cost-effective option.

Monthly maintenance fees for checking accounts typically range from $5 to $25 but may be waived if certain conditions, such as maintaining a minimum balance or setting up direct deposits, are met. Overdraft fees can be as high as $35 per occurrence. Some institutions offer overdraft protection, but this may also come with fees, either as a flat charge per transfer or as an interest-bearing credit line.

Other potential charges include ATM fees for out-of-network withdrawals, wire transfer fees, and foreign transaction fees for purchases made abroad. Some banks impose inactivity fees on dormant accounts. To minimize costs, account holders should compare fee structures, opt for accounts with fewer restrictions, and use fee-free banking options whenever possible.