Long-term savings accounts can serve diverse purposes including saving for college, vacations, large purchases, retirement, and many more. You can also leverage your long-term savings to manage your everyday cost of living when you are no longer working or to pay for one-time expenses.
Compare multiple long-term savings options and their fees, interest rates, and potential returns to increase your chances of making the best decisions about keeping your money, as not every savings account is suitable to achieving your needs and goals.
What Is a Long-Term Savings Account?
A long-term savings account is a tool you can use to set money aside for a future goal or emergency fund.
It is different from a checking account, which is typically used to hold money you spend regularly. You don’t have to leave your savings in your account forever, but you generally shouldn’t plan to take the money out soon.
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Long-term savings accounts are different from other types of accounts because they’re designed to hold money you don’t expect to spend in the near future. Some institutions charge monthly account fees, so be sure to look for one that doesn’t.
If you’re looking to set money aside for a long-term goal like buying a house, planning for retirement, or saving for college, a long-term savings account might be helpful. It’s a good idea to compare shops and see which financial institutions offer the features that matter most to you.
Be sure to ask about fees, interest rates (APY), minimum deposits and withdrawals, and any other restrictions.
If you have money in a savings account, you’ve probably heard it called a short-term savings account. Long-term savings accounts work the same way and might pay slightly more interest depending on the financial institution you are considering.
The difference between short term and long-term is that long-term savings accounts are designed to hold money you don’t expect to use in the near future, such as for upcoming expenses like a wedding or dream vacation. While short-term savings accounts have fewer restrictions and can be used for a variety of goals.
Consider a long-term savings account to save for goals and emergencies that are years or even decades away, like buying a house, starting a family, putting your kids through college, or retiring.
You can choose from many types of accounts at banks and other financial institutions. Some may have monthly fees, penalties for taking out money early, and other rules to follow.
Who Needs a Long-Term Savings Account?
Long-term savings accounts are great options for anyone planning to make a major purchase in the future.
A high interest rate will help ensure you stay on track to save for that new home, car or vacation. So, if you’re looking to buy a home in the future, having a savings account with a high interest rate can help you save for that down payment without tying up your money until you’re ready to make your purchase.
Opening a long-term savings account could also help you earn more than traditional savings accounts. Preparing for a major expense years in advance means knowing that you have the money when the time comes to buy or make a payment. You also have time to check interest rates and find the right account for your future needs.
Types of Long-Term Savings Accounts
When you’re comparing long-term savings accounts, consider interest rates, fees and tax rules to find the right one for you.
Also consider factors such as whether your account is federally insured and any applicable withdrawal penalties.
There are lots of long-term savings accounts to choose from. You could open a fixed term account or one paying out variable interest.
Accounts can also be managed in such a way that you get paid your interest regularly or probably only when your savings mature. Some long-term savings accounts will also let you save in a tax-free way (up to certain limits).
Hence, different accounts have different rules, so it pays to understand how they work. So, here are long-term savings accounts you can consider opening right now.
1. High-Yield Savings Accounts
People who want to save in the long-term can earn higher rates and APYs with high-yield savings accounts. These accounts are typically available through online banks and may charge fewer fees than brick-and-mortar institutions. Before opening a new account, don’t forget to check to make sure it’s FDIC-insured.
If high interest rates are your priority, consider an online high-yield savings account. They typically pay higher interest rates than brick-and-mortar banks and credit unions, with few fees in exchange for letting you do your banking from your computer or smartphone.
Saving money can be hard, but high-yield savings accounts make it easy for you to put away more for the future.
Keep your spare change in a high-yield account that can help your balance grow faster than with a traditional account. With lower fees, higher interest rates and annual percentage yields (APYs) than regular savings accounts, these accounts can help your money work for you.
2. Education Savings Accounts
A 529 savings account is a great way to start saving for the future cost of your child’s education. With tax-deferred growth and tax-free qualified withdrawals, you’ll be well on your way to helping your child succeed.
With a 529 college-savings account, you can save money on behalf of a qualified beneficiary, including your child, grandchild or even yourself.
Coverdell ESAs are similar to 529 savings plans in that your contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. Coverdell ESA allows you to save up to $2,000 a year for education expenses.
The account grows tax-deferred and withdrawals are tax-free if used for qualified educational expenses.
A 529 savings account is not only a tax-free way to save for a child’s higher education but can help you save for your own college tuition, too.
3. Certificates of Deposit
Certificates of deposit, or CDs, are time accounts to help you save for the future. The money you add to this type of long-term savings account earns interest over a specific amount of time (generally 3 months to 10 years).
The longer the CD term, the higher your interest rate and APY are likely to be. Certificates of deposit (CDs) are a type of savings account that you invest in for a specific amount of time, or term. In exchange for tying up your money within that term, you earn interest at the end of that period.
The duration of many CDs can range from 30 to 90 days all the way up to 10 years or longer.
CDs are also one of the safest ways to save money. With hundreds of different rates, terms and types, you can always find a CD that suits your needs.
Choose a standard CD by itself or combine it with an interest-earning savings account and watch your money grow.
4. Individual Retirement Accounts
Individual retirement accounts (IRAs) can help you build a retirement nest egg through tax-advantaged investing. With a traditional IRA, you may be able to deduct your contributions on your taxes each year.
Traditional IRAs allow you to deduct your contributions from your taxes, while Roth IRAs do not. However, qualified withdrawals from Roth IRAs are completely tax-free. With both kinds of IRAs, your money can be invested in a variety of different assets such as mutual funds or exchange-traded funds.
While the risks and rewards of IRA investing can vary widely, you should carefully consider your own risk tolerance before choosing a specific IRA or investment for it.
Also, IRA allows your money to be invested in stocks, bonds, and other funds, so it can potentially grow much more than in a savings account with a set interest rate.
5. Employer-Sponsored Retirement Accounts
Employer-sponsored retirement accounts are a great savings product. They come with tax advantages similar to IRAs, but the annual contribution limit is much higher.
What gives 401(k) plans an edge over IRAs is the potential to get an employer matching contribution. And, if you need access to those funds, consider taking a loan or hardship distribution — an option available to 401(k)s but not IRAs.
If your employer offers a 401(k) or 403(b) plan, you may have the option to rev up your retirement savings by selecting an automatic deduction from your paycheck.
You’ll get valuable tax breaks on contributions and investment earnings—and if your employer matches a portion of what you put in, you’ll essentially get free money to help fund your long-term retirement goals.
Employer-sponsored retirement plans, such as a 401(k) or a 403(b), are great ways to save for retirement. One of the best features is that you can contribute pretax earnings and lower your taxable income for the year.
Another benefit is that most employers will match contributions to varying degrees up to a certain percentage of salary.
How To Use Long-Term Savings Accounts Wisely
If you’re saving for a long-term goal — like buying a house — it can make sense to use long-term savings accounts like CDs and high yield savings.
To make the most of these accounts, compare rates; pay attention to maturity dates, and know that rates can fluctuate over time.
The interest you’ll earn on your balance will compound over time as your balance grows. Compare different types of savings accounts for a good rate, and then sit back and watch your money grow!
Savings accounts are excellent for building up an emergency fund or funding long-term goals. With high-yield accounts, you can earn more money than you would in a checking account or traditional savings account. Just make sure to compare rates, pay attention to maturity dates, and check your statements to ensure you’re getting the best rate possible.
With a long-term savings account, you can save money and accumulate compounded interest over many years. You can make contributions or withdrawals at any time, and some accounts even offer tax benefits.
Make sure you have an emergency savings fund set aside, then start building long-term savings for your family. Compare different accounts and choose the one that works best for your unique situation.
If you’re saving for a major goal down the road, a long-term savings account is a good way to do it. These accounts are great for building up your savings over time, but they have minimum balances and other restrictions that make them better suited for long-term goals instead of everyday needs.