What Is It?
Checking accounts allow people to deposit money, write checks, and combine safety with easy accessibility to their cash. Also known as a demand deposit, a checking account may be defined as any bank deposit that the depositor may demand (withdraw) at any time. Sometimes known as demand deposits, checking accounts are offered by commercial banks, savings banks, savings and loan associations, and credit unions. Funds accepted by a financial institution for a checking account are subject to immediate withdrawal by the depositor. Generally, you put money into your account by depositing funds; you withdraw money by writing checks or getting cash at an ATM. A check is a draft drawn upon a bank and payable on demand, signed by the maker or drawer, promising to pay a certain sum of money to the order of the payee.
Checking Account as an Investment Vehicle
There are two types of checking accounts: non-interest-bearing accounts (regular checking) and interest-bearing accounts. Regular checking accounts are typically (but not always) a less expensive alternative for those who tend to keep modest balances ($100 to $500) or who write a relatively small number of checks per month. Often, no service charges are imposed if your minimum monthly balance does not fall below a certain level.
The annual rate of interest on an interest-bearing checking account is usually lower than that offered by a CD or money market account. Many accounts offer interest rates that may change periodically to reflect changing rates in the money market.
Some institutions require a minimum deposit to open a checking account; others do not. In addition, some institutions require that you maintain a minimum balance in your account if you want to avoid fees. Some banks also charge a fee each time you write a check and each time you make an ATM transaction. Some banks also offer you the ability to pay bills online.
Which type of account is best for you? To compare the total annual cost of accounts offered by different banks, you need to know the various fees they charge. Then, base your decision on your own experience. What is the average balance you typically maintain? How many checks do you write per month? Weigh this against the annual interest rate the various banks pay.
A NOW account is one type of interest-bearing checking account. NOW stands for negotiable order of withdrawal.
Some Checking Accounts Pay Interest
The interest earned on a checking account is usually posted to accounts on a monthly or quarterly basis. This can be advantageous if you tend to maintain a high monthly balance in your account. On the downside, however, the interest rate is fairly low.
Checking Accounts Are Convenient
In addition to giving you the ability to write checks, many checking accounts are linked to debit cards that allow you to make purchases electronically without writing a physical check. Also, most banks now offer the ability to pay bills and review your account records online.
Checks Assist in Record-Keeping
Checking accounts are useful if it's important for you to have written proof of payments you've made to creditors, a charity, or others. If you keep your cancelled checks, or otherwise have access to them, you will have such proof of payment.
Tip: The Check Clearing for the 21st Century Act, which became effective on October 28, 2004, allows a bank to process a check by converting it to an electronic image of the front and back of the paper check. As part of this process, you may receive a substitute check, which is a paper copy of the electronic image, with your statement. For record keeping and proof of payment purposes, a substitute check is legally the same as your original check.
Flexibility and Liquidity
It's easy to open a checking account. You can also make deposits and withdrawals to your account virtually whenever you like. Checking and savings accounts are probably the most liquid of investments because your money is not tied up for any period of time, unlike CDs. You can usually withdraw your money at will without paying a penalty.
Accounts Are Insured By the Government
Most checking accounts that are offered by chartered institutions are insured for up to $250,000 per depositor per bank by the Federal Deposit Insurance Corporation (FDIC). There are comparable insurance programs at credit unions. The insurance applies to each ownership format per bank. For example, a married couple with $250,000 each in accounts owned separately by each person, and an additional $400,000 in an account held jointly in both their names would qualify for FDIC coverage of the entire $900,000.
Restrictions and Fees May Apply
Some financial institutions require a minimum beginning deposit to open the account, and some require that you maintain a specified minimum balance to avoid a monthly fee. In addition, some institutions may charge activity fees if the number of withdrawals you make within a given period exceeds a set limit, or an inactivity fee if you do not use the account within a specified amount of time. There may also be charges for checks returned for insufficient funds. Certain types of accounts charge fees for ATM withdrawals, and set limits on the amount of money you can withdraw from an ATM each day and/or each week.
Interest Rates Are Low
The interest paid on your checking account balance may not be enough to counter the effects of taxes and inflation. Typically, you'll earn less on a checking account than you would if you had invested the same sum of money in other cash alternatives. Therefore, it's probably wise to maintain a balance in your checking account that is just high enough to pay your regular bills (as well as satisfy your bank's minimum requirements, if any).
On the surface, an account that pays you interest looks more advantageous than one that doesn't. However, interest-bearing checking accounts usually have monthly fees and other charges. If the annual fees are higher than the annual interest you earn--as is often the case when you maintain a small balance--you might actually lose money. Conversely, if your monthly balance is high enough, you may come out ahead with an interest-bearing account.
The interest you receive from a checking account represents ordinary taxable income that you must report on your federal income tax return (and probably your state return, as well). At the end of the year, your financial institution will send you a Form 1099-INT, summarizing the interest you received.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.