What is a demand deposit account?

Written by: Sarah Archambault
• Updated •5 min read
Man using his laptop at home, smiling and talking on the phone as he researches demand deposit accountsImage: Man using his laptop at home, smiling and talking on the phone as he researches demand deposit accounts

In a Nutshell

Demand deposit accounts are a type of bank account designed for spending, such as a checking account. Some types of bank accounts may limit the amount of money you can access or when you can make a withdrawal. But with a demand deposit account, you can take out money easily.
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If you use a bank account to pay your bills and day-to-day expenses, you already have a demand deposit account.

“Demand deposit account” may sound mysterious, but a DDA is really just another term for an ordinary checking account.

Let’s explore what a demand deposit account is, how it works and how it compares to other types of bank accounts.

What is a demand deposit account?

Demand deposit accounts are spending accounts that let you withdraw your cash whenever you need access to it. DDAs are just one of many types of accounts you may find at a financial institution, such as a bank or credit union, where bank accounts are typically designed to either help you save, spend or grow your money.

How do demand deposit accounts work?

Demand deposit accounts aren’t overly complicated. They’re what the Federal Reserve calls “transaction accounts” and let the account holder deposit money in an account and withdraw the cash at any time. Depending on the financial institution, demand deposit accounts may come with their own unique features, including interest, fees or minimum balance requirements.

Let’s take a closer look at how DDAs operate.

  • Depositing money — You can fund your DDA in a few different ways, including making a cash deposit at the bank or ATM, depositing a check directly at your bank or through a mobile deposit app, or adding a direct deposit to your account (like your paycheck).
  • Withdrawing money — You typically have several ways to take money out of your DDA, and you’re generally able to access your cash whenever it’s convenient for you. With many DDAs, you can write a check, use online bill pay, pay with a debit card or make a withdrawal at an ATM.
  • Interest, fees and minimum balances — While some DDAs may offer the ability to earn interest on the money in your account, not all do. You may also have to pay fees to have a DDA or checking account. But even when this is the case, your bank may waive fees if you meet certain requirements, such as maintaining a minimum balance or having your paycheck directly deposited into the account.

Why are demand deposit accounts important?

As with other types of deposit accounts, the FDIC insures demand deposit accounts (up to $250,000, depending on different variables). Because they’re FDIC insured, DDAs can help keep your money safe until you’re ready to spend it. You can also conveniently access your cash whenever you need it in a few different ways, including checks, ATM withdrawals and taking cash out at the bank.

While most DDAs allow you to get your money whenever you want, some accounts may require you to give up to seven days’ notice.

What are some examples of demand deposit accounts?

Banks and credit unions offer different types of demand deposit accounts. Here are a couple of examples.

  • Traditional checking accounts — With a checking account, you can access your money using a check, debit card or electronic payment. You can also withdraw money at your bank in person or at an ATM.
  • Savings accounts — You can take cash out of your savings account without having to notify the bank that you’re doing it, so technically savings accounts can be considered DDAs. But note that the law limits withdrawals to just six per month — though the Federal Reserve is currently allowing financial institutions to suspend this limit to help people have easier access to their cash during the pandemic. Keep in mind that while the Fed is allowing this, not all banks are waiving the limit, so you’ll want to check with your institution to see what the current limit is.

What types of accounts aren’t considered demand deposit accounts?

Here are some types of accounts offered by banks and credit unions aren’t DDAs.

  • Deposit accounts — Also known as “time deposit accounts,” these accounts require you to keep your money in the account for a certain amount of time before you can take it back out. They include Christmas club accounts and certificate of deposit accounts.
  • Money market accounts — Though they typically have some features of both checking and savings accounts, money market accounts generally aren’t DDAs because of the limits on transfers and withdrawals from the accounts.
  • NOW accounts — NOW accounts are similar to checking accounts, but they let you earn interest on your cash. And though your bank or credit union has the right to require you to get permission in writing before making a withdrawal, most banks don’t usually enforce this as a rule.
  • Accounts tied to credit — You might get checks to access loan money or a credit line from a bank or credit card company where you may have a personal loan, HELOC or other type of credit. But these types of accounts aren’t DDAs — they’re credit products.

What are the advantages and disadvantages of demand deposit accounts?

Not sure if a demand deposit account is the best place to keep your money? Consider these pros and cons.

Pros

  • Easy access to cash withdrawals.
  • Safely store your money with the confidence of FDIC insurance or National Credit Union Administration protection if your account is with a credit union.
  • Grow your cash with an account that may pay interest on your balance.

Cons

  • Some banks charge overdraft fees, monthly maintenance fees or nonsufficient funds fees.
  • There might be a required minimum or maximum balance on your account.
  • The number of withdrawals from a savings account may be limited.  

Next steps: Deciding which bank account is right for you

Banks and credit unions offer many different types of accounts, including DDAs. Each type of account can be useful, depending on your financial needs and goals.

If you want a reliable, easily accessible account in which to store your money until you need it for everyday expenses, a checking account can do those things. For money that you don’t need to access regularly, and that you’re counting on for some growth, consider a savings account or certificate of deposit since both earn interest. A savings account is also a good place to build an emergency fund.

And if you’re saving for retirement or want to grow your wealth, investment accounts like IRAs and mutual funds can help.

About the author: Sarah Archambault is a freelance writer based in New England. She enjoys learning new ways to spend money wisely and helping others figure out how to make smart financial decisions. Sarah is a graduate of the Newhouse… Read more.