What Are the Different Types of Non-Interest-Bearing Accounts?

Navigating the world of banking, many consumers opt for non-interest bearing accounts for their simplicity and accessibility. According to the Federal Deposit Insurance Corporation (FDIC), these accounts, often checking accounts, are designed to offer users ease of daily transactions without the complexities of earning interest. While they typically cater to those seeking minimal maintenance, the International Monetary Fund highlights that options like basic, student, senior, and joint accounts can vary, with some potentially accruing interest under specific conditions. It's essential for account holders to understand the terms, as the choice between interest and non-interest bearing accounts can significantly impact financial management and long-term savings strategies.

One of the most popular non-interest-bearing accounts is the basic checking account. This is typically used by a person who wishes to have the account for transaction purposes only. While the terms for these accounts vary widely, they are for the most part low frills and tend to have a few restrictions. Some requirements may include keeping a minimum balance, paying a monthly fee, or writing a limited number of checks per month before a fee is charged.

Student and senior checking are other widely-used non-interest-bearing accounts. These tend to have lower or no fees on things such as checks, automatic teller machine use, and teller service. This kind of account may also offer low credit card rates and traveler’s checks.

There are also special low-cost non-interest-bearing accounts for customers with low income. Some regional governments require that banks offer these accounts under terms determined by the government. They do not require a minimum balance and tend to have very low or no monthly fees. While checks may be free, there is usually a limit on how many can be written per month without a fee.

Some non-interest-bearing accounts are used primarily via computer, phone, and automatic teller machine. Though this can be a convenient, easily accessible account type, there may be a fee for teller use. This is often a good choice for customers who rarely need to go to a physical bank to do banking.

While they can offer interest, there are also non-interest-bearing accounts for joint customers. These usually offer many of the same services as a basic checking account. They tend to be less common for joint holders.

Non-interest-bearing accounts are often a good option for people who are new to banking, such as children. They have enough services to help a new customer get acclimated to the process of banking without being too demanding. These types can also be particularly useful for customers with little cash or who tend to keep a low balance. Some accounts are even entirely free.

Though non-interest-bearing accounts can be a simple, economical choice, it is typically advisable not to keep too much money in them. Customers who have idle cash from month-to-month will usually benefit from having at least a savings account. Other low-risk options include money markets and certificates of deposit.

With an interest-bearing account, a bank pays the holder a fee, or interest, in exchange for letting the bank use that money. The bank calculates interest as a percentage of the account balance. Financial institutions often label these accounts as savings accounts.

Since interest is taxable income, account holders must report fees received on their annual tax returns. It does not matter how small the interest amount may be. They need to report every cent to the IRS. Fortunately, the IRS only taxes the interest and not the entire balance of the savings account.

The financial institution usually provides its customers with the necessary tax documentation each year. The IRS calculates the tax due at the same rate as the account holder's standard income tax rate for that year.

Savings accounts are an excellent way to make extra money without losing access to the funds. Customers can withdraw cash from a savings account at any time without penalties. However, some banks limit the number of monthly transactions allowed with these accounts, making them difficult for everyday use.

As a result, account holders may keep a checking account for daily spending and deposits while only accessing the savings account for more significant deposits or withdrawals. Some banks make this easy by connecting savings and checking accounts so holders can transfer money quickly between the two.

Banks might also offer checking account overdraft protection with a linked savings account. This arrangement automatically transfers money from a savings account to the connected checking account if funds are too low to cover a purchase. While there may be fees for this service, they are usually less than overdraft and returned check fees.

A non-interest-bearing account does not earn money for the account holder. As a result, there is nothing to report to the IRS because the account generates no taxable income.

Another investment opportunity is a tax-deferred account, such as a 401K or Roth IRA. Employees can participate in these savings plans by investing pre-tax money into the account. Any money deposited into the account is not reported to the IRS because taxes are not due until the account holder removes the funds.

Companies that identify as non-profit organizations can make money through interest-bearing accounts.

A non-profit organization, or NPO, is a business that puts money towards a specific cause. While the owners and employees can get paid a salary, any extra money earned is used towards its cause and not put into the owners' pockets.

Though owners do not profit from an NPO, it is still a business with cash flow. An excellent way to protect its money is with a bank account. Investing overages into a savings account is a simple way for NPOs to make more money. However, the profit from the account’s interest must further its cause and not be a salary bonus.

The IRS categorizes non-profits differently than for-profit businesses. Non-profits do not pocket money above their operating expenses. Any excess gets returned to the community through the NPO’s cause. As a result, the IRS does not tax a non-profit, including interest made from a savings account, as long as it handles the money appropriately.