Savings Accounts and Overdraft Protection
September 5, 2008 by Miranda Marquit
Filed under Finance
When I wrote a few days ago about overdraft protection, I received this interesting comment from James (capitalcouplesfinance.com):
Overdraft protection can be worth it…but not if it’s tied to a line of credit. I don’t know if all banks are like this, but mine allows you to tie it to another account that you hold there, such as your savings account. Then you only get hit with the transaction fee. No annual. No interest.
I thought this was interesting, and asked my bank about it, only to find that it is not a possibility. The “customer service manager” told me that the decision was connected to federal law.
So I looked into it. According to the Federal Reserve’s Regulation D, a savings account can only do six transfers a month. Of any kind. My bank contact, when I asked him about it again, said, “That’s the main reason we don’t do savings account overdraft protection. It just raises questions because each transaction would be a separate transfer. You can come in and withdraw money as much as you want, but transferring directly is something different.”
(Although I do wonder if fees, lucrative fees, have something to do with the reticence to attach to a savings account as well.)
You can see where issues might come into question. If you didn’t catch your mistake soon enough, you may run into limitations on the transfering that can be done to cover your overdraft. Other than that, though, I can see the appeal in being able to have an automatic transfer.
Another option is to have the two accounts linked, or to be able to shift a large amount of money over — once — if you are worried.
Thanks for featuring my comment today. I’m really glad you looked into this a little more to flesh it out. Unfortunately, your bank only gave you half the picture.
When I worked for a bank, I was actually involved in handling accounts that violated Reg D by exceeding the maximum number or transactions allowed per statement cycle. Reg D doesn’t apply to run-of-the-mill savings accounts. It applies to accounts that both earn interest and allow limited check writing privileges (e.g. money market accounts).
Check out this page from my bank’s website: http://www.commercebank.com/personal/saving/comparison.asp?nav=left . You can compare the features of different types of savings accounts including the number of transfers/withdrawals allowed. My bank allows 3 per month that are free, and charges $1 each for 4 and up.
As I understand it, if you have a regular savings account (the kind that earns basically no interest!) you can make unlimited transfers, but if you have a money market type account, it’s limited by Reg D.
As long as you don’t overdraw your account 6 times a month, you’d be fine connecting it to one of these Reg D covered accounts. But to be on the safe side, OD protection should probably only be set up on regular savings accounts.
Hope this helps clarify a little.
Thank you for the clarification, James! This is great information and very interesting. Interesting, too, how the bank uses Reg D as an excuse, even though it may not apply…
I’m with Bank of America and I have my overdraft protection coming from my regular savings account, and not my credit card. I’m not sure why your bank says you can’t do that, but that’s how mine works. Then I think if the savings account doesn’t have enough money, I would just run into a deficit and get charged for that.
Thanks Allison! It appears that there are quite a few banks that have some sort of linking between checking and savings accounts. This would be much preferred to using a line of credit.