Savings accounts, certificates of deposit (CDs), and IRAs are three common types of financial savings tools. While they all have one main thing in common—they help you save money—there are some differences between them. Deciding which one is right for you largely depends on your individual financial needs and goals.
A savings account is a basic type of bank account. You deposit your money into the account to earn interest. It is ideal if you want to save up for a short-term goal or need easy access to your money. It's also generally pretty easy to open one, including opening an account online. You may find that the interest rates are higher than most checking accounts offered.
A certificate of deposit, or CD, is another type of savings product that is also offered by banks and credit unions. It requires a minimum deposit amount and usually requires you to commit to keeping your money in the account for a specific amount of time which is why it's also known as a time deposit. The benefit of CDs is that they tend to have higher interest rates than a regular savings account but if you withdrawal the money from the account earlier than the designated amount of time, there will generally be fees or penalties imposed.
Finally, there's an IRA, or individual retirement account. An IRA is not an account you normally use for daily savings but rather a long-term savings vehicle designed to help you save for retirement. An IRA offers different tax benefits than a regular savings account or CD. It's always smart to seek advice from your CPA or tax advisor to understand the implications of this account on your taxes.
No matter which type of savings product you choose, the key is to find one that meets your short-term or long-term goals and keeps you motivated to save. Doing your homework on all three options will help ensure you make the right decision for your financial future!