When you're looking for a safe way to save your cash while earning a return on your money, a bank account is about as good as it gets. Banks accept cash deposits as a way to attract funds that they can lend out to make a profit. A bank account is one of the safest places to park your cash because your stash can only grow over time, and accounts are eligible for federal insurance.
Bank Account Basics
Any time you deposit cash in a bank account, you are essentially making a small loan to the bank that manages your account. When you take out loans, you have to pay interest for the privilege of using the bank's money. On the flip side, the bank pays interest to you when you lend it money by deposing cash in a bank account. The interest rates banks offer your savings tend to be relatively low, because the banks need to be able to lend that cash back out at higher rates to make money.
Types of Accounts
A bank can offer a variety of deposit accounts, with different features and benefits. Checking accounts let you access cash easily though check writing or debit cards, but typically pay little or no interest. Standard savings accounts offer a modest amount of interest and generally don't restrict your access to funds. Banks may also offer certificate of deposit accounts and money market accounts, both of which tend to pay more interest than normal savings accounts. With a certificate of deposit, you commit to saving for specific period of time and can't access your cash before that period ends without penalty. Money market accounts typically have high minimum balance requirements and may limit you to a certain number of withdrawals each month.
One of the main benefits of saving at a bank is that the Federal Deposit Insurance Corporation insures deposits at participating companies. FDIC insurance guarantees that up to $250,000 of your account balance is safe, even if your bank falls on hard times and can't meet its financial obligations. The $250,000 limit applies to the total amount in a single bank, so you can spread your cash across a few banks to make sure all of it is insured.
The interest credited to a bank account is a form of taxable income, so you have to send a cut of your returns to the Internal Revenue Service. Interest is taxed at the ordinary income tax rate that applies to your wages. Interest you make inside of a retirement account that offers tax deferral, like a 401(k) or individual retirement account, is not taxed, so if your bank offers IRAs, you can put money into an IRA account and avoid paying interest on it, but cannot withdraw the interest, or in the case of a traditional IRA the principal, until retirement without penalty.
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