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12 Types of Savings Accounts You Should Know About

People working towards retirement come from all economic backgrounds and have many different levels of education, but these people all have at least one thing in common: they should be saving money for retirement.

In a time when everyone seems to be swimming in debt, that may sound like a far cry. Obviously, the present is more immediate and you’ll need to climb out of debt before you can start thinking seriously about investing in your future well-being.

Many of the people reading this site are dealing with credit card debt and other forms of economic hardship, but once you avoid insolvency, it’s time to start thinking about life after work. If you don’t save for retirement, you’re like Alice stuck in the Red Queen’s trap, where running the same speed is only going to see you fall behind.

Lucky for you, saving is easier than it sounds. Once you get past the confusing terms and figure out what the different savings accounts are, you’ll be able to make an educated decision based on solid facts.

Savings Accounts – 12 Options

One of the 12 types of savings accounts I’ve listed below are going to be right for you; it’s just a matter of picking the right one. So read through these twelve types of savings account you should know about and learn how to secure your future prosperity.

Statement Savings Account – This is one you’re probably familiar with. If you have a savings account where the bank sends yoiu a statement at the end of the month, then you already know about statement savings accounts.

Passbook Savings Account – This is one you probably haven’t heard about, but I bet your grandparents did. Back in the old days, people could open savings in which they had to record their transactions in a small book. Despite this, these were popular, because law stated these accounts had to pay 5% interest. After banks were deregulated in 1986, banks could sell these rates. Now the interest on these savings is about 5%, about the same as the statement accounts.

Savings Accounts for All Consumers

The Perfect Savings Account Exists for Every Consumer

Share Account – The “share account” is simply the name given by Credit Unions to their traditional saving account. Credit union share accounts tend to pay a higher interest rate than their counterpart at the banks, so consider joining a local credit union if one of your motivations is to save money for the future. Keep in mind that returned checks aren’t sent back to you, though that drawback should apply more to the “shared draft account”–the credit union checking account.

Money Market Accounts – A money market account usually requires you to keep a higher minimum balance than statement savings, but they pay out at a slightly higher interest rate. If the one is at 2%, then money market savings might pay at 2.5%. Search online at a site like Bankrate and you’re likely to find higher rates–sometimes a couple of percentage points higher.

Money Market Funds – Not to be confused with the above entry, the money market fund is an actual mutual fund. For that reason, this type of saving is not insured by the FDIC. That’s not as big of a problem as it sounds, because federal law requires money market funds to be invested in short-term investments to high-quality sources. A typical money market fund investment would be a short-term loan to a government agency or a corporation. These funds often yield as much as 5%, though you can shop around for the best prices.

Certificates of Deposit – CDs tend to offer the biggest interest rates of all these accounts listed, but with a couple of mutually-reinforcing restrictions. One, you agree to keep the money in the account for a specific amount of time, usually somewhere between 3 months and 6 years. Two, if you withdraw money before the stipulated time, you’ll face a substantial penalty for doing so. Don’t put money into a certificate of deposit unless you don’t intend on needing that money anytime soon. Still, if you have the extra money to sit at rest and gain interest, this is a good, safe place to put the money. The FDIC does insure this savings account up to $250,000.

401k Account Plans – The 401k is available to employees of businesses with a 401k plan. As an employee, you can place a certain stipulated amount of money into these savings each month. When you do, that money is matched by your employer. In other words, this is a way you can increase your salary without asking your boss for a raise. You don’t have to pay taxes on this money until you withdraw it, too. The only stipulation is it goes into your retirement savings. If you have the opportunity to invest in a 401k plan and you don’t invest the maximum allowed, you’re crazy. It’s free money. These accounts have been around a while, but they’ve become popular in the last generation because companies would like to move away from the traditional pension. If you don’t have the option for 401-k investments, look instead at the next alternative.

IRA Account Plans – The IRA account is popular with people who want to save for the future, but whose career or employer doesn’t have a 401k plan. Again, you can place a certain amount of money in your individual retirement account ($2,000 per year) and a combination of federal and state agencies match those funds. Again, it’s free money and tax-free money at that. You’ll pay penalties (and taxes) if you withdraw these funds before retirement, but the point is you’re saving for old age, so it’s a bad idea to siphon from the IRA account, anyway.

403(b) Account – The 403(b) account is the same as a 401(k) plan, except it’s designed for employees of nonprofit organizations. If you work at a school, a hospital, or a government office, you can join in their 403b tax-sheltered accounts. These used to be tax-shelted annuities or TSAs, but they’ve become much closer to their for-profit cousins over the years. By the way, investing in a annuity isn’t suggested with these plans, which is one reason that part of the deal has been phased out.

457(b) Account – The 457(b) deferred compensation plan is much different from the 401k and 403b plans. It has fewer restrictions, but is considered “non-qualified” by the federal government. The same laws which apply to the other deferred compensation plans don’t govern 457(b) accounts. You don’t incur the 10% penalty for taking out money early, while you can make higher contributions. Also, if the company offering the 457 plan also has a 401k or 403b, you can invest in both. At the same time, companies don’t have to offer this option to everyone, and a required minimum withdrawal plan goes into effect when you turn 70 and 1/2 years old. These accounts were put in place originally for state and local government employees like police officers, firefighters and even teachers and administrators, in a few cases. This type of account stays in place, but it’s been expanded for highly compensated employees of non-profit corporations, so people who work for hospitals, unions, and charitable groups might qualify. Independent contractors working for these groups also might qualify, though that’s not always true.

529 College Savings Account – Parents should open up a college savings plan if they want to avoid (or want their child to avoid) the debt trap that is the student loan. The 529 account is tax-free, does not allow your children to access or have control of the account (you do), allows anyone to contribute, has no income limitations, or any age limit when it must be used. If you’re family’s scholar gets a scholarship and you have unused money in the 529 account, you can withdraw that money without penalty (besides paying taxes, of course). Finally, if your child decides not to go to university or postsecondary school, you can roll the account over to another member of your family.

Individual Development Account – The IDA programs got started back in the 1990s to help what are called “working poor”. If you work and you make money at less than twice the poverty line, you probably qualify for an individual development account. EITC and TANF eligible people probably qualify for this program, too. The IDA was designed to help people with limited means save for one of three things: (1) retirement, (2) a college education for their child, or (3) to start a small business. When you deposit money into an IDA fund, a combination of federal, state, and local government agencies, or private civic groups (or even banks) match those funds. The IDA is like a 401-k for people at the lower end of the economic ladder who wouldn’t qualify for such programs otherwise. To learn more, search for the “Office of Community Service” at the US Department of Health and Human Services, but this is by no means the only program available. The “Office of Refugee Resettlement IDA Program” helps those affected by natural and man-made disasters, while the “Beginning Farmer and Rancher IDA Program” is meant to help people in rural areas.

YouTube Videos on Savings Accounts

If this basic introduction doesn’t provide the information you want, the video I provide below is the first in a list of 200 YouTube videos on savings accounts. Yes, two-hundred videos. Once they begin, they’ll play on a loop until you decide to turn them off. Readers can browse through the list, picking and choosing the tutorials which seem like they answer your questions the best.

The series begins with “Finance Tips” from eHow Finance, a respected provider of how-to lists and other basic guides to living in the modern world. The information you need is easily accessed online, if you know where to look or someone points you in the right direction. I’ve done the searching for you, which I’m happy to do.

Saving Money Is Investment in Life

You never know what the future holds. People have no idea how long their retirement may be, so it’s best to put back a little bit of money every month to save for what may come. Remember, the miracle of compound interest–that is, interest compounding over many years–turns small investments into huge savings. It’s the same economic mechanism which turns a manageable credit card debt into a mountain of payments, except in the case of savings, interest is working on your behalf.

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