Published in: Banks | June 4, 2020
By: Emma Newbery
Ever wondered why you're only allowed to make six savings withdrawals a month? It all comes down to Regulation D.
There are various accounts designed for saving that offer higher interest rates than checking accounts -- from savings accounts to certificates of deposit (CDs) and money market accounts (MMAs). But you'll find those higher returns often come at the cost of convenience.
In the case of a CD, you'll need to commit to leaving your money alone for a set term. With savings accounts and MMAs, something called Regulation D normally limits you to six "convenient" transactions a month. Not to be confused with the SEC's securities-related Regulation D, this one was introduced by the Federal Reserve to control spending from savings accounts.
To understand Regulation D, we first need to know a bit about the Federal Reserve and the U.S. banking system. The Fed has existed for over 100 years with a mission to keep America's economy and financial system as stable as possible.
One aspect of this is making sure financial institutions have enough money on hand to keep the economy moving. When you deposit money with the bank, your cash doesn't just sit there waiting for you to take it out again -- the bank puts it to use, for example by loaning it out. That's one way financial institutions make money, which they can then use to pay interest on your deposits.
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But what would happen if lots of people tried to withdraw their money at once? The banks wouldn't be able to pay. And it would quickly get out of hand -- if word got around that people couldn't withdraw their money, there would be hordes of people at the doors of every financial institution clamoring for their funds.
That's called a "run on banks," and it's exactly the type of thing the Federal Reserve wants to prevent. One of the ways it manages this is requiring that banks keep a certain amount of money in reserve. And it helps banks to maintain those reserves by limiting the number of savings withdrawals customers can make. Regulation D basically makes it difficult for people in that angry mob to instantly withdraw all of their savings.
The Fed isn't stopping you from accessing your money, but it is making it more inconvenient for you to do so. It's a bit like the difference between a purchase on a website where you've already saved your card details, and one that involves physically going to a store and standing in a long queue. You might still do the latter, but you're likely to do it less because it will take more effort.
All of this begs the question, what is a "convenient" transaction? Well, it's essentially any easy way you can move money around, including:
Your savings account may not offer some of these features at all, such as a debit card or check-writing capability, and the penalties for making more than six transactions will differ from bank to bank. Some may charge you a per-transaction fee, and others might close your account or turn it into a checking account.
Regulation D does not restrict the number of "inconvenient" transactions you can make, although you should also check to see if your bank has specific rules for your account. Inconvenient transactions include:
There are several ways you can avoid penalties for going over the transaction limit. The simplest is to always use your checking account for your everyday banking. If necessary, make one larger transfer between your savings and checking account to cover your costs. Plan out how much money you might need each month, and organize your transfers accordingly.
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If you've set up overdraft protection by linking your savings account to your checking account, be careful -- these automated transfers count as convenient transactions.
If you're pushing your transaction limit, visit the bank or ATM and make your withdrawal or transfer directly. Regulation D notwithstanding, it's good practice to avoid making lots of withdrawals from your savings account -- after all, the whole point is to use it for the money you want to save.
The novel coronavirus has changed many aspects of our lives, and Regulation D is no different. On April 24, the Federal Reserve announced that it would temporarily suspend the six-transaction rule, effective immediately. Banks are now allowed, but not required, to take those restrictions off savings accounts and MMAs. It's up to each bank or credit union to set its own rules, so check with yours before you make any additional withdrawals.
This is in part because people may need easier access to their savings right now. Plus, in these stay-at-home times, the Fed does not want to encourage people to go to banks or ATMs -- inconvenient transactions may actually be dangerous, not just a hassle.
The other reason is that the Fed has reduced the reserve ratio (the amount banks need to keep in their coffers) to zero. As discussed above, previously, banks needed to keep a percentage of their deposits in reserve, and the restriction on withdrawals was in place to help them do so.
If you're worried that this means your money is less safe in the bank, don't panic. The bank reserves and Regulation D are only two of many protections. As a consumer, the biggest thing to watch for is FDIC insurance, which covers your account for up to $250,000 of losses if a bank collapses. It protects up to that amount per person, per financial institution, per type of account. So if you have more than $250,000 that you want to keep in accessible or short-term savings, you could divide it between different accounts or even banks for the sake of complete safety.
Interest rates vary, but the best high-yield savings accounts and money market accounts can pay rates as high as 1.5%–2%. In the long term, you will get much higher returns by investing your money on the stock market, but this comes with additional risk. Since share values can rise and fall, it's not a good choice for money you may need to access in a hurry.
The interim suspension of Regulation D makes a savings account an even more appealing place to park your cash, but you should make sure it is the right option for you. If your bank has lifted the restrictions on withdrawals, you could get the benefit of an interest-earning savings account with some of the flexibility of a checking account, at least for now.
Bear in mind that the Fed has not said how long the interim rules will be in place. As with many of the emergency COVID-19 measures, it's not a great idea to rely on them in the long term. If you are regularly making more than six withdrawals from your savings account per month, find out if there's a fee. And if there is, try to limit yourself to one or two big transfers rather than multiple smaller ones.
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