New immigrant to the United States? What are the banking accounts available to you? Find out in this post.
Your life has many stages and, accordingly, there will be different banking requirements for each stage. If you are a student, you may need to make a number of small transactions on a daily basis. If you are an earning professional, you probably have large sums of money deposited into your account every payday and would want to earn a good interest on those savings. If you are in your mid 40s, you may prioritize planning for your retirement. While banks in the US have this sorted - they will advise you on which account will work best for you based on your needs - it’s always a good idea to be armed with information. Let’s understand the nuances of various accounts and see how you can better manage your
money.
Before we start, check out the article on Understanding Banking Terms in the US, so that you are up to speed on the common banking and credit terms.
What are the Different Types of Banking Institutions in the US?
The Federal Reserve is the central bank of the US which helps in the policy formulation and monitoring of the flow of currency amongst other banks. Typically, banks in the US come under the purview of either the Federal laws or the State Laws. Depending on whom they are registered with, US banks are classified under National Bank, State Member Bank, State Non-Member Bank, Federal Savings Association, State Savings Association, and Credit Union.
This is interesting to know, and maybe you would like to consider the above differentiation while choosing a bank. But from a user’s perspective, the following distribution might help you more:
Retail Banks
Retail banks are the most common type of banks and cover a major part of the personal banking sector. Their focus is on individuals who need bank accounts, credit cards, remittance services, and any other individual-specific requirements.
Commercial Banks
The focus of commercial banks is on businesses, which require a large number of transactions and have to deal with large sums of money at once. Commercial banks also provide loans, trade finance, management services, and many other products and services for any type of business.
Online Banks
These are banks that do not have any physical branches; everything from onboarding to transfers happens online. As the infrastructure investment is smaller in online banks compared to traditional banks, the offerings in terms of interest rates and rewards can be much higher.
Credit Unions
A credit union is a not-for-profit organization owned by its members, who generally have a common or binding characteristic like the organization they work for, where they live, or any other such factor. The offerings are similar to other banks, but credit unions are not insured by the FDIC (Federal Deposit Insurance Corporation); rather they are insured by the NCUA (National Credit Union Association). The insured amount is US $250,000 and the other conditions are also similar to FDIC-insured banks.
Savings and Loan Association
These are also known as Thrifts. They are less popular now, but they help in using one’s savings amount for funding loans.
What are the Different Types of Bank Accounts?
Ah, yes, the plethora of bank accounts in the US has puzzled many newcomers. Broadly speaking, these are the different types of bank accounts available:
- Checking accounts
- Savings accounts
- Money market accounts
- Certificates of deposit
- Brokerage accounts
- Individual retirement accounts
Let’s go over each of them:
Checking Account
A checking account is best suited for you if you have a large number of monthly transactions. It is largely preferred by students as their first bank account. This is also known as a Transactional Account. It comes with a checkbook and a debit card. A checking account is perfect for keeping smaller amounts of money for shorter durations, and helps you manage your monthly cash flows easily.
Generally, there is no (or very low) interest rate on these accounts, but you can compare the banks on their APY (Annual Percentage Yield) if you want to earn a higher interest rate on your checking account. There may be a minimum required deposit and a monthly maintenance fee attached to your checking account, so remember to check that as it may be an important factor while deciding which bank to open your checking account with.
Savings Account
If the interest income on your deposit is a big requirement and you are open to limited withdrawals per month, a savings account should be your choice. These accounts earn higher interest when compared to checking accounts, but lower interest than a certificate of deposit or money market account.
A savings account is a very good place to park your money to achieve your financial goals or to stash money for an emergency. You can make deposits at any time to this account, but withdrawals are traditionally limited to six per month. You do not get a debit card along with this account.
Money Market Account
This has a combination of features of both a checking and a savings account. For instance, you can write a given number of checks monthly and get a higher interest rate than a savings account on your deposits. But all of this comes with a few restrictions on the minimum account balance required, monthly withdrawals fixed up to six, and higher fees.
This account is ideal for people who tend to have large deposits in their accounts and are fine with limited check or debit card transactions per month.
Certificate of Deposit (CD)
In this type of account, the deposited amount earns the highest interest, but there is a time-based commitment that can range anywhere from three months to 10 years. If you are from India, you will find it very similar to a Fixed Deposit. Typically, a long-term CD will earn higher interest than a short-term one.
Suppose you have a sum of $5,000 which you would like to keep aside for your car that you plan to buy after a year. You can take a CD earning an interest of 1%, and have $5,050 at the end of the year. This type of account is suitable for those who have a certain amount which they would require only after a fixed duration.
Brokerage Account
This can be considered as a typical investment account that you can open with an investment company or a brokerage firm. This account gives you access to a host of investment options, such as stocks, bonds, mutual funds, and - in certain cases - options, futures, and other alternatives.
A brokerage account can be opened with a small, or zero, initial deposit and does not have any limit on the deposit. The earnings through these accounts are taxable. You can have multiple brokerage accounts and if you decide to close one and change the brokerage firm, the money can be transferred to the other account very easily.
Individual Retirement Account (IRA)
The IRA is a savings tool through which you can save for your retirement. This allows you a deposit limit of $5,500 per year if you are below 50 years, but an extra $1,000 can be deposited if you are above 50. If this amount is withdrawn before 59 and a half years of age, it attracts a penalty.
There are two types of IRA: Traditional and Roth. In a traditional IRA, the contribution is tax-deductible, and the earnings are tax-deferred which would be applicable on withdrawal. An early withdrawal attracts a penalty. But in Roth, the contribution is made after taxes, and thus is not tax-deductible. There is no age limit restriction on when you can start withdrawals.
People generally get confused between IRA and 401(k), but the major difference is that 401(k) is employer-sponsored and there is no limit to the amount which can be deposited.
Which Type of Account Should I Opt For?
The preferred choice for a first account would be a checking account or a savings account. Then, along the way, you can try other types of accounts as and when you become eligible for them. To know about the detailed process, refer to our article on Opening a US Bank Account as a Non-resident.
Ready to Bank in the US?
With 5,000+ banks available across the US, it’s tough to look around and choose one. So, list out your requirements first, and then start looking for options that cover all your needs. Zolve can help you zero in on the right bank, and also open an account from India.
With this article, it should be clear which type of banks you require and what type of accounts you would need. Remember to do as much research as you can, and ask your American friends or university counsellors for advice as well. A well thought out decision will hold you in good stead during your time in the US.
Follow this space for more posts like this. We hope they will help make your life more comfortable in the US.
