Checking vs Savings Accounts: Which One Should You Choose?

Nearly eight in 10 (79%) U.S. adults (18 and older) have a bank account, such as a checking account, according to the Fed’s report on the economic well-being of U.S. households from 2019 to May 2020. However, with so many different types of accounts available, it can be challenging to determine which one is right for you.

Two of the most common types of bank accounts are savings and checking accounts. While they may seem similar at first glance, there are significant differences between them that could impact your financial goals.

In this article, we’ll compare savings vs checking accounts and help you decide which one is best for your needs.

Comparing the Pros and Cons of Checking vs Savings Accounts

While both accounts have their advantages and disadvantages, they are intended for different purposes. Below are the pros and cons of checking and savings accounts:

Checking Accounts

A checking account is designed for everyday transactions like paying bills or making purchases. They offer easy access to your money through debit cards or checks and often come with online banking options.

Pros:

• High liquidity: Checking accounts are highly liquid because they allow unlimited deposits and withdrawals.
• Overdraft protection: Many banks offer overdraft protection services that prevent declined payments due to insufficient funds.
• FDIC insurance: Funds held at chartered banking institutions are guaranteed by the Federal Deposit Insurance Corp up to $250,000 per individual depositor per insured bank.

Cons:

• Low-interest rates: Most checking accounts do not earn high-interest rates compared to other types of bank accounts.
• Fees: Some banks charge monthly maintenance fees or require minimum balances to avoid fees.
• Limited transaction history: Banks typically only keep records of transactions for six months before deleting them from their system.

Savings Accounts

A savings account is designed for long-term saving goals like building an emergency fund or saving up for a down payment on a house. They usually offer higher interest rates than checking accounts but limit how often you can withdraw money from them.

Pros:

• Higher interest rates: Savings accounts generally earn higher interest rates than traditional checking accounts.
• Goal-oriented saving: Saving money in a separate account helps people stay focused on their long-term financial goals.

Cons:

• Limited liquidity: Savings accounts usually limit  withdrawals and transfers per month to 6 or less
• Fees: Some banks charge fees for low balances or monthly maintenance.

Paying Taxes on Your Bank Accounts – Is It Different For Checking vs Savings Accounts?

When it comes time to file taxes each year, many people wonder if there’s any difference between paying taxes on their savings versus their checking account balances.

The short answer is no; there isn’t much difference when it comes time to pay taxes since both types of bank accounts generate taxable income if they earn more than $10 in annual interest income.

However, saving accounts may earn more interest than checking accounts, and therefore may generate higher income and tax liabilities. This is why it’s important to review your bank statements regularly and keep track of any interest earned throughout the year so you can accurately report it on your tax returns.

Understanding Taxes On Savings And Checking Accounts – What’s The Difference?

While both savings and checking accounts generate taxable income if they earn more than $10 annually in interest income, the way that the income is taxed is different depending on the account type. For checking accounts, income is generally reported as ordinary income on a tax return.

However, for savings accounts, income is most often taxed at the capital gains rate if there was a gain when the money was withdrawn from the account. This means if you hold an investment for years before withdrawing money, you’ll pay fewer taxes than if you had held it for only a few months.

High Yield Savings Or Traditional Checking Account? Making Your Choice

If you’re trying to choose between a high-yield savings account or a conventional checking account, it’s important to know the differences between them. High-yield savings accounts are great for people who are looking to save up money over a long period of time. They offer higher yields on their deposits compared to other bank products like checking accounts.

On the other hand, a conventional checking account offers immediacy when it comes to accessing your money. It allows you easy access to all the money in your account right away without waiting for days or weeks for money to clear. In addition, you can easily transfer funds between your different banking products using online banking services.

Business Banking – Choosing Between A Business Checkings Or Savings Account

Commercial checkings and savings serve different purposes in business finance. Commercial checking serves as the primary operating account for a business while commercial savings serves as an emergency fund. Business owners should consider opening both types of accounts because each serves a different function.

Commercial checkings allow businesses to pay bills, make transactions, and deposit revenue into one centralized location. While commercial savings offer higher interest rates which help in building an emergency fund in case of future financial difficulties.

Checking vs Savings Accounts: Which Is Better For Everyday Transactions?

For everyday transactions like buying everyday items, paying bills, and making payments, one needs a conventional checking account.

Conversely, saving is better for transactions that have a longer horizon like real estate investments, buying other substantial assets, or taking advantage of favorable market conditions. Furthermore, since checks are no longer as popular as a form of payment today, hence it is advisable to pick a convenient debit card instead.

Conclusion

Choosing between a checking and a savings account is crucial to determine what type of transactions will take place in the future. If it is an everyday transaction that is needed, a conventional check will work best.

But if there is a strong desire to save up towards long-term goals – like buying other substantial assets – then setting up something like a high-yielding check is the best way forward.

Remember, taxes apply to dividends generated by both types of sources – so keep that in mind when planning for the long term. Finally, determine the type of fees that will be associated with these choices – and try to make sure that they are still reasonable even after factoring in the potential gains from either choice.

FAQs

1. What Are ChexSystems And Early Warning?

ChexSystems and Early Warning are the two main consumer report agencies that maintain records of bank activity including opened service charges, closed depositary records, and credit reports among others. 

Financial institutions use ChexSystems to report negative information about customer activities. Early Warning Services focuses on fraud prevention and identity verification rather than creditworthiness assessment.

2. Do I Have To Pay Taxes On My Bank Account Balances?

No. Taxes are not levied on your balance unless it has earned more than $10 annually in interest income.

3. Can I Have Multiple Check And Saving Accounts At Different Banks?

Yes. You can easily open several different types of bank products at different banks depending on your needs. Just make sure to compare fees, rates, and features before deciding where to open an account.