What Is a Savings Account?
In plain English
A savings account is a deposit account held at a bank or credit union that pays interest on your balance. It is designed for money you want to keep safe and grow slowly rather than spend day to day. Savings accounts are FDIC or NCUA insured and provide a low-risk place to build an emergency fund or save for goals.
How Does Interest Work on a Savings Account?
Banks pay interest on your deposited balance, typically compounded daily and credited monthly. The rate is expressed as an APY. Your interest earnings depend on the balance, the APY, and how long the money stays deposited. Higher balances and higher APYs generate more interest. Most savings accounts have variable rates that can change over time.
Are There Limits on Savings Account Withdrawals?
Federal Regulation D previously limited certain savings account withdrawals to six per month, but this rule was suspended in 2020. Many banks have not reinstated it. However, some banks still impose their own limits or charge excess withdrawal fees. Check your bank's specific policy to understand any restrictions on your account.
What Is the Difference Between a Savings and Checking Account?
Savings accounts earn higher interest but are designed for less frequent access. Checking accounts offer unlimited transactions with debit cards and checks but pay little or no interest. Most people use both: a checking account for daily spending and a savings account for money they want to grow. Transfers between the two are typically instant at the same bank.
Frequently asked questions
How much should I keep in a savings account?
A common guideline is to keep three to six months of living expenses in a savings account as an emergency fund. Beyond that, money earmarked for short-term goals (one to three years) is also well suited for savings accounts.
Do I pay taxes on savings account interest?
Yes. Interest earned is considered taxable income. Your bank will send you a 1099-INT form if you earn $10 or more in interest during the year. You must report all interest income on your tax return regardless of the amount.
Keep exploring
Related terms
APY
APY (Annual Percentage Yield) measures the total interest you earn on a deposit account over one year, including the effect of compounding.
High-Yield Savings Account
A high-yield savings account offers significantly higher interest rates than traditional savings accounts, typically available through online banks.
Emergency Fund
An emergency fund is cash set aside to cover unexpected expenses without going into debt. Most experts recommend saving three to six months of living expenses.
Checking Account
A checking account is a bank account designed for everyday transactions like paying bills, making purchases, and withdrawing cash.