Recently, a co-worker told me that his bank turned his savings account into a checking account without even asking for his authorization. He explained that when he called his bank they said he’d exceeded a monthly transaction limit on his savings account.
He asked, “Are they allowed to do that?”
The short answer is yes, they can do that. Under federal law, banks are required to limit transfers that account holders make from their savings account.
What my co-worker didn’t realize was that he got off easy. Most banks will hit you with fees ranging from $5 to $20 every time you exceed the monthly limit on savings account transactions.
Maybe you’ve seen a message from your bank notifying you that you’ve reached your monthly transaction limit. I remember seeing that message and thinking it was strange that my bank would place some type of limit on my savings account activity. If you’ve been looking for answers to that mystery, look no further. I’m about to explain what it means to you, why the limit exists, and how you can avoid any fees that might come from exceeding the monthly transfer limit.
Six-Transfer Limit on Savings Accounts
Depository institutions (i.e., banks, credit unions, savings and loan associations, etc.) are required to limit transactions within savings and money market accounts. According to Regulation D, an account holder cannot make more than six “convenient” transfers or withdrawals per month from their savings deposit account.
What Transactions Count Toward the Six-Transfer Limit?
During any monthly statement period, you cannot make more than six “convenient” withdrawals or transfers from your savings account through online banking or other electronic means. For purposes of this limit, “convenient” transfers include:
- Online transfers from your savings account to a linked account (e.g., your checking account)
- Outgoing online transfers from your saving account to another bank through ACH transfer
- Transfers or withdrawals initiated by phone, fax, or computer
- Preauthorized, automatic transfers or withdrawals made by a third-party (e.g., automatic bill payments or overdraft protection)
What Types of Transactions Don’t Count Toward the 6 Transaction Limit?
It is worth noting that there are “less-convenient types of transfers” that do not count toward your six-transfer limit and do not affect your account’s status as a savings account. Those types of transfers include withdrawals or transfers made in-person at your bank, by mail, or by using an ATM.
You can also make unlimited deposits to your savings account and unlimited transactions of any kind to and from your checking account.
What Happens If You Exceed the Limit?
If you exceed the limit, you can face certain consequences. At a minimum, your bank will take away the transfer and draft capabilities of the account. Usually, this means your bank will close your account and place your funds in a transaction account (i.e., checking account).
Other banks are less sympathetic. Some banks will assess an “Excess Transaction Fee” or “Withdrawal Limit Fee” on all transfers exceeding the six-monthly transaction permitted by Regulation D.
While six transfers may seem like plenty, remember that you can easily exceed the limit if you have unlimited overdraft protection.
Also keep in mind, your first six transfers are legal transactions. It isn’t until after your sixth withdrawal that your bank will probably begin assessing fees or convert your savings account to a checking account.
Why is there a Six-Transfer Limit?
It probably seems counter-intuitive for banks to limit your ability to access your own money. And it probably seems unfair to be penalized for transferring funds from your savings account. Isn’t that part of the reason we have bank accounts, so we can access our money when we need it?
But federal law, Regulation D, imposes certain reserve requirements on depository institutions. The reserve requirements, which require banks to have a certain amount of cash on hand, are different based on the type of account. Regulation D doesn’t impose a reserve requirement for savings and money market accounts, but it does impose a reserve requirement for checking accounts.
Due to the frequency of checking account activity, logic would dictate that banks should have greater cash reserves on hand to satisfy that increased demand. Because savings accounts are not subject to a reserve requirement, the transfer limit helps to keep deposit withdrawals to a minimum.
That’s a complicated way of saying that Regulation D is designed to prevent you from using your savings account like a checking account.
Avoiding the Limit and Incurring Fees and Penalties
There are several ways you can avoid fees or having your savings account converted to a checking account.
The two most commons reasons that people exceed the limit is because they schedule preauthorized transfers to come out of their savings account or because they have overdraft coverage which automatically transfers funds from their savings account to cover a deficiency in their checking account.
An obvious solution is set up all preauthorized bill payments through your checking account instead of your savings account. If you can’t avoid transfers to and from your savings account, try planning ahead so you can have fewer transfers but in larger dollar amounts. Finally, you always have the option for unlimited withdrawals at your branch or through an ATM.
Here’s the bottom line: Don’t let the banks take your money! Now that you’re aware of the monthly limit you can plan ahead and avoid those unnecessary fees for excess withdrawals!