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What is Regulation D?

Before the popularity of online banks with their high yield savings accounts, you never transferred money directly out of a savings account. You usually transferred it to your checking account and then write checks, withdrew cash, or used a debit card. Regulation D [3] didn’t matter to you, the limit of 6 ACH transfers [4] didn’t matter to you, and you were never penalized for it.

Now, with everyone trying to optimize their savings to maximize their accrued interest, it’s happening more and more often and it’s pissing people off because banks are charging them fees and, when it happens too often, closing these accounts.

So what is Regulation D and why is there this limit of 6 transfers?

Regulation D

When you’re talking finances, there are two Regulation Ds. The first one is by the SEC and it involves the regulation of securities (like stocks). Specifically, Regulation D from the SEC outlines what qualifications an issuance must meet in order to be exempt from the registration requirements. The second one, and the one we’ll discuss in this article, is regulation of bank deposits and is issued by the Federal Reserve Board.

Chances are you started researching Regulation D because you received a letter from the bank warning you about the number of transfers you made. This letter may have accompanied a fine or even the closure of your account. While you may be upset at the bank, it’s not their fault.

Regulation D actually refers to §204.2(d)(2) [5], which defines a savings account. By definition, it’s one where you are not allowed to make more than six transfers in or out in a statement cycle or calendar month. The reason why this rule exists is because the reserve requirements, or how much of your balance the bank needs to keep on hand, is lower on savings accounts compared to checking accounts. Since it is lower, your savings account shouldn’t be used like a checking account. Since the reserve requirement is lower, the bank is able to give you a higher interest rate because your money is out “working,” rather than sitting in the “vault.”

Why was this not an issue before? The regulation makes an exception for transfers to another account you own or when the transfer or withdrawal is made in person or via ATM.

How to Avoid 6 Transaction Limit

It’s quite simple – get a checking account at the bank you currently have a savings account. If it’s at an online bank, the checking accounts usually offer great interest rates (great relative to the nothing you get at a brick and mortar bank) and you can transfer funds between it and your savings account as often as you’d like.

So, if you get a letter or email from your bank warning you about the 6 transaction limit, don’t get upset. They’re just doing their job.

(Photo: redspotted [6])