How To Choose Right Long-Term Savings Account : Best 20 Ways

Long-term savings accounts can be used to save for large purchases, college expenses, retirement, and more. You can use long-term savings to pay for one-time expenses or help manage your day-to-day living costs once you’re no longer working.

Comparing different long-term savings account options, their interest rates, potential returns, fees, and more can help you decide where to keep your money. Not all savings accounts will meet your needs and goals, so consider the various types before signing up.

Key Takeaways

Long-term savings accounts are used to hold the money you don’t expect to use any time soon.

You might use a long-term savings account if you have a financial goal like saving for your child’s college tuition.

There are several types of long-term savings accounts, such as high-yield accounts, IRAs, or certificates of deposit.

What Is a Long-Term Savings Account?

Long-term savings accounts are designed to hold the money you don’t expect to need to spend in the near future. They’re different from short-term savings or checking accounts that you might use to set aside money for bills, an upcoming vacation, wedding, or other one-time expenses. You can have a long-term savings account at a bank, credit union, or other financial institution. Some may charge monthly account fees, have withdrawal limits or penalties, and other rules to follow.

Long-term savings accounts are generally suited for goals that are several months or years away and help you take advantage of compounding interest. The longer you have to save and let interest compound, the more your money can grow.

Note

Before you start building your long-term savings, it’s essential to make sure you have short-term cash available in an emergency fund first. Financial experts recommend keeping three to six months’ worth of expenses in emergency savings.

These accounts can be used to further specific financial goals. For example, you may open a long-term savings account to get a head start on college planning while your kids are young. Or you may want to build long-term cash savings in a retirement account as part of a strategy to retire early.

Who Needs a Long-Term Savings Account?

Having a long-term savings account can benefit virtually anyone who wants to make the most of the money they don’t plan to spend soon. For example, say you want to buy a home in the future. Opening a savings account with a high interest rate can help you fund a down payment while earning interest until you’re ready to make your purchase.

Long-term savings can also pay off when you’re ready to retire. You can diversify your income sources with different types of long-term savings accounts. And certain types of accounts can offer tax advantages when you’re adding money to them—or when you need to withdraw it later.

Types of Long-Term Savings Accounts

Long-term savings accounts aren’t all alike, so it helps to know how they compare. Looking at the interest you could earn, fees you might pay, and whether there are any applicable tax or withdrawal rules can help you decide which long-term savings accounts are right for you.

Note

Interest rates for savings accounts and certificates of deposit (CD) are influenced by the federal funds rate. If the Federal Reserve raises or lowers this rate, banks may make similar adjustments to interest rates for deposit accounts.

High-Yield Savings Accounts

High-yield savings accounts offer interest rates and annual percentage yields (APYs) above what you may get with a traditional savings account. Brick-and-mortar banks and credit unions can offer high-yield accounts, but online banks often pay better rates to savers.

That’s because online banks tend to have lower overhead costs, which allows them to pass on higher rates to their customers. High-yield savings accounts from online banks can also charge fewer fees, allowing you to keep more of the interest you earn. Nevertheless, before moving money to any new savings account, check to make sure it’s FDIC-insured first.

Certificates of Deposit

CDs are time accounts. The money you add to this type of long-term savings account earns interest over a specified period. Once the CD matures, you receive your initial deposit along with the interest earned.

Some CDs can have shorter terms, ranging from 30 to 90 days. However, some have terms as long as 10 years. Generally, the longer the CD term, the higher your interest rate and APY are likely to be (but not always). Make sure you compare CD rates before choosing one.

Note

CD accounts often have early withdrawal penalties. Many banks or credit unions charge a percentage of the interest earned when you withdraw money from your CD ahead of the maturity date. If you choose to use a CD for your savings, make sure you have emergency funds elsewhere. Otherwise, you’ll have to pay early withdrawal fees if you take the money from your CD.

Individual Retirement Accounts

Individual retirement accounts (IRAs) are a tax-advantaged way to save for retirement. With a traditional IRA, you may be able to deduct your contributions on your taxes each year. With a Roth IRA, you don’t get a tax deduction for contributions, but qualified withdrawals are 100% tax-free.

Unlike a CD or a regular savings account, money saved in an IRA can be invested in mutual funds, exchange-traded funds, or other investment types. While IRAs carry more risks than CDs, there’s also a much greater potential for your money to grow if your chosen funds perform well.

Note

Withdrawing from an IRA before age 59 1/2 can trigger a 10% early withdrawal penalty. Depending on which type of IRA you’re taking money from, you may have to pay income tax on the withdrawal. Learn the difference between a traditional IRA and Roth IRA before deciding on one.

Employer-Sponsored Retirement Accounts

An employer-sponsored retirement plan—like a 401(k) or a 403(b)—is another long-term savings account with tax advantages. Contributions are tax-deductible, and the annual contribution limit is much higher than IRAs.

The potential employer matching contributions give 401(k) plans an edge over IRAs. If your employer matches a percentage of your contributions, you’re essentially getting free money to help fund your long-term retirement savings goals. You may also be able to take a hardship distribution or loan from your 401(k) if needed.

Note

If you take out a 401(k) loan and leave your job before it’s been repaid, your employer can ask for the entire balance in full. If you can’t pay it back, the loan is treated as a taxable distribution.

Education Savings Accounts

A 529 savings account allows you to contribute money on behalf of a qualified beneficiary, including your child, grandchild, or even yourself. Those contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses.

A Coverdell Education Savings Account (ESA) works along the same lines, but the difference is that a Coverdell ESA caps your annual contributions at $2,000, and no new contributions can be made after the beneficiary’s 18th birthday. Additionally, all money must be withdrawn from the account by the beneficiary’s 30th birthday; otherwise, a tax penalty applies.

How To Use Long-Term Savings Accounts Wisely

If you’re using a long-term savings account to plan ahead, there are a few tips to keep in mind to get the most out of your efforts:

Compare interest rates: Analyze multiple savings accounts and CDs so you can shop around carefully and get the best rate possible.

Pay attention to CD maturity dates: The penalty for early withdrawals can easily wipe out any interest you’ve earned.

Remember that rates can fluctuate: Savings and CD rates can increase or decrease over time. Diversifying across different savings accounts can offer some insulation against rate changes.

Choose accounts that fit your time frame: Ideally, you want to have as long a runway as possible to benefit from compounding interest.

Check account fees: While you may be earning good returns from your investments or interest rate, hidden fees could nibble away at those earnings.

Don’t drain retirement accounts prematurely: In doing so, you could not only end up with a large tax bill, but you may also shrink your nest egg.

The Bottom Line

Long-term savings accounts let you save money and accumulate compounded interest that you may not need for several years or even decades. Some of these accounts, such as an IRA or a 401(k), can also offer tax advantages when you make contributions or withdrawals.

Before you start building long-term savings, make sure you have a short-term emergency savings fund in place. Then compare different long-term savings options, rates, fees, and penalties so you can find the best rate of return for your money.

Frequently Asked Questions

Which savings account is best for long-term?

Which is best depends on what you’re saving for. Roth and traditional IRAs are good for retirement savings, and 529 plans are good for your children’s college tuition.

What are the three types of savings accounts?

There are several types of savings accounts, but the most popular are deposit accounts, money market accounts, and certificates of deposit.

What are examples of long-term savings?

Some examples of what you might be saving for in the long term are a car, major home renovations, retirement, emergency funds, or possible medical expenses.

how to save money in a long term bank account?

To save money in a long-term bank account, you can consider opening a Public Provident Fund (PPF) account. It is a tool offered by the Indian Government with a minimum investment of Rs 500 and maximum of Rs 1,50,000 per annum ¹. The account has a lock-in period of 15 years and offers tax benefits under Section 80C of the Income Tax Act ¹.

Apart from PPF, you can also consider investing in other long-term savings instruments such as Roth IRAs and 529 plans.

Long-term savings are highly effective and very likely to result in meaningful wealth creation because it places your focus on things that really matter when it comes to saving. So, instead of thinking about day-to-day fluctuations of stock prices, you would focus on the company’s growth prospects or management competency.

Remember, billionaire Mr. Seth Klarman has said, “The single greatest edge an investor can have is a long-term orientation.” Since childhood we have been asked to go for a long run, which means that we have been asked to think about our future. 

Are savings accounts good for long-term?

Some of the best things in life are worth saving for, from an incredible vacation in Asia to the down payment on your dream house. A long-term savings account can keep your money safe and pay interest as you accumulate funds over time.

How does a long-term savings account work?

The Bottom Line. Long-term savings accounts let you save money and accumulate compounded interest that you may not need for several years or even decades. Some of these accounts, such as an IRA or a 401(k), can also offer tax advantages when you make contributions or withdrawals.

How long is a long-term savings account?

For example, saving for a vacation or an event like a wedding. Medium-term savings plan: Medium-term savings plans have a duration of three to seven years. For example, saving for a down payment on a home. Long-term savings plan: Long-term savings plans feature goals that you’d like to achieve in more than seven years.

What type of account is good for long-term savings?

High-yield savings accounts—typically found at online banks, neobanks and online credit unions—are savings accounts that offer a higher APY compared to regular savings accounts. This is one of the best types of savings accounts to maximize your money’s growth.

Why is long term savings important?

Saving provides a financial “backstop” for life’s uncertainties and increases feelings of security and peace of mind. Once an adequate emergency fund is established, savings can also provide the “seed money” for higher-yielding investments such as stocks, bonds, and mutual funds.

How much should you have in long term savings?

Most financial experts end up suggesting you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that’s about how long it takes the average person to find a job.

What is a long-term saving goal?

In a Nutshell. Long-term financial goals can take five or more years to achieve and generally apply to major life plans, like homebuying and retirement. Eliminating your debt can also be considered a long-term financial goal.

What are the features of a long-term savings account?

These kinds of accounts usually attract an overall higher interest rate than short-term investments. The longer time horizon also protects the money invested from short-term price volatility. Some long-term savings accounts offer some tax relief, such as tax-free withdrawals and tax-deferred growth.

What is long-term locked savings?

Having a locked savings account means you can’t withdraw money from that account. With this lock in place, you can still deposit money to your account and watch your balance grow, if your account isn’t hidden from internet banking. You can request a lock through the chat feature in internet banking or the app.

How can I improve my long-term savings?

The answer is simple – through investments. By investing your savings, you can multiply the amount, all while you are busy saving some more. There are many short- and long-term options available, so it’s up to you to choose one that takes into account your future needs, and the amount of money at your disposal.

How do you build long-term savings?

How to set and achieve your long-term savings goals

1. Being realistic about your savings goals. …
2. Measuring and adjusting your long-term savings plan and goal. …
3. Choosing an account made for long-term savings. …
4. Keeping your savings separate from each other. …
5. Automating your savings

Which long term savings option is the most secure?

Treasury Bills, Notes and Bonds

U.S. Treasury securities are considered to be about the safest investments on earth. That’s because they are backed by the full faith and credit of the U.S. government. Government bonds offer fixed terms and fixed interest rates.

What is the difference between current and long term accounts?

Current liabilities are due within one year or within your normal operating cycle, while long-term liabilities are due after one year or beyond your normal operating cycle. This difference has implications for your balance sheet presentation, your liquidity and solvency analysis, and your interest expense calculation.

Which type of savings is best?

High-Yield Savings Account

This is one of the best types of savings accounts to maximize your money’s growth. Online banks often offer different types of high yield savings accounts to attract savers who want to earn a better interest rate than what is found at brick-and-mortar banks and credit unions.

What is the use of long-term savings to earn a financial return?

Investing is the use of long-term savings to earn a financial return. Investing is a proven and powerful way to strengthen your financial position over time. It is an essential part of providing for future needs. It provides a source of income in addition to a paycheck, allowing you to make money on money.

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