What Is Regulation D?

Ever wondered why you can't make as many withdrawals as you want from your savings account? It's because of a federal regulation called Regulation D which limits the number of transfers and withdrawals you can make each month.

One of the big differences between an account designed for saving and a checking account is you have less flexibility in how you access your money. For example, a certificate of deposit (CD) or a money market account (MMA) will likely pay a higher rate of interest than a checking account. But Regulation D means 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, Regulation D normally limits you to six "convenient" transactions a month. Not to be confused with the SEC's securities-related Regulation D, this was introduced by the Federal Reserve to control spending from savings accounts. Let's take a deeper dive into exactly what is Regulation D.

Understanding Regulation D

To really understand what Regulation D is, 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 or credit union 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 savings deposit.

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'd 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 does this is to require 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 that angry mob to instantly withdraw all their savings.

Limiting Regulation D transactions won't stop you from accessing your money, but it will make it more inconvenient. It's a bit like the difference between shopping on a website where you've already saved your card details, and 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.

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What is a "convenient" transaction?

All of this begs the question, what is a "convenient" transaction? Well, Regulation D limits any easy way you can move money around, including:

Automatic transfers, including overdraft payments
Other convenient transfers such as a telephone transfer or electronic one
Transactions made via online banking or mobile banking apps
Payments by debit card or check

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. And your savings account may not even offer some of these features, such as a debit card or check-writing capability. Either way, it makes sense to try to stay within the Regulation D limit.

What is an "inconvenient" transaction?

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:

ATM transactions
In-person transactions at the bank or credit union
Calling the bank and having it mail a check

There are several ways you can avoid penalties for going over the Regulation D 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.

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.

Regulation D and COVID-19

The novel coronavirus has changed many aspects of our lives, and the Regulation D rule is no different. On April 24, 2020, the Federal Reserve announced that it would temporarily suspend the six-transaction rule, effective immediately. Banks are now allowed, but not required, to lift transaction restrictions for savings accounts and MMAs. It's up to each bank or credit union to set its own rules. 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 Regulation D helped them 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 complete safety.

The interim suspension of Regulation D makes savings accounts and money market accounts even more appealing places 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 the best savings accounts with some of the flexibility of a checking account, at least for now.

The Fed hasn't said how long the interim Reg D limit 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 find you often make more than six savings withdrawals 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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