A NOW account, short for Negotiable Order of Withdrawal account, is an interest-bearing checking account that federal rules reserve for a limited group of depositors: individuals, sole proprietors, nonprofit organizations, and government entities. If you qualify, you can write checks, pay bills electronically, and earn interest on the same balance. For-profit businesses cannot open one.
Who Can Open a NOW Account
Eligibility is set by federal regulation 12 CFR 204.130, and the list is narrower than most people expect.1eCFR. 12 CFR 204.130 – Eligibility for NOW Accounts
- Any individual, regardless of how the money will be used. Someone depositing business revenue into a personal-name account still qualifies.
- Sole proprietors, including those operating under a DBA. The account can be titled in the individual’s name or the trade name.
- Nonprofit organizations operated primarily for religious, charitable, educational, or political purposes. The regulation names organizations under IRC Sections 501(c)(3) through 501(c)(13) and 501(c)(19), political organizations under Section 527, and homeowners or condominium associations under Section 528.
- Government entities at the federal, state, and local level, including counties, municipalities, school districts, and U.S. territories such as Puerto Rico, Guam, and American Samoa.
Pension funds, escrow accounts, and security deposits held under agency arrangements also qualify if the entire beneficial interest belongs to individuals or other eligible entities.
Who Cannot Open One
The regulation draws a hard line against for-profit enterprises. Corporations, partnerships, associations, business trusts, and any other entity “organized or operated to make a profit” are prohibited from holding a NOW account.1eCFR. 12 CFR 204.130 – Eligibility for NOW Accounts That covers C corporations, S corporations, and LLCs or partnerships taxed as either. A nonprofit that ends up operated for profit rather than for its stated mission also loses eligibility.
A for-profit business shut out of a NOW account is not shut out of interest on its checking balance in general. Since 2011, banks have been free to pay interest on ordinary checking accounts, and business checking products that pay interest are now widely available.2Federal Register. Prohibition Against Payment of Interest on Demand Deposits
How the Interest and Fees Work
NOW accounts pay interest on the balance, with the rate set by the institution rather than by law. Most banks calculate interest on the daily balance and credit it monthly. Rates are usually variable, and some banks tier them so larger balances earn a slightly higher yield.
The yields tend to be modest. High-yield savings accounts often pay 50 to 100 basis points more, because savings products are built for money you touch less often. For balances you actually spend from, a NOW account at least pays something.
Watch the minimum balance. Banks commonly waive monthly service fees only if you keep somewhere between $500 and $5,000 on deposit, and the exact threshold varies. Drop below it and the fee kicks in, which can easily exceed the interest the account paid that month. If your balance tends to run thin, the math turns against you.
How It Compares to Regular Checking and Savings
The old dividing line was that NOW accounts paid interest and checking accounts did not. Dodd-Frank ended that in 2011 by repealing the federal prohibition on paying interest on demand deposits.3Federal Reserve Board. Section 19 – Bank Reserves Since then, checking accounts have been allowed to pay interest too, including for the for-profit businesses that NOW accounts exclude.
Day to day, a NOW account feels like any other checking account. You get a debit card, write checks, set up direct deposit, and move money electronically. Two things still separate it on paper: the eligibility rules described above, and a technicality that lets the bank require seven days’ written notice before a withdrawal. Almost no bank ever invokes that notice period.
Against a savings account, the trade runs the other way. Savings accounts usually pay more but don’t allow check writing, and some banks still cap the number of transfers you can make even though the Federal Reserve lifted its own six-per-month limit in 2020.4Federal Reserve Board. Federal Reserve Board Announces Interim Final Rule to Delete the Six-Per-Month Limit A common setup is to run bills and spending through a NOW account and keep longer-term cash in a savings account for the higher yield.
Is Your Money Insured?
Yes. NOW accounts at FDIC-insured banks are covered up to $250,000 per depositor, per ownership category, and the FDIC lists them explicitly among insured deposits.5FDIC. Deposit Insurance at a Glance Coverage includes accrued interest as well as principal, as long as the total stays under the limit.
If you hold more than one account at the same bank, the ownership categories are what determine how much is protected. An individual NOW account, a joint NOW account with a spouse, and accounts held through a revocable trust each sit in separate categories, each insured up to $250,000.6FDIC. Understanding Deposit Insurance Credit unions offer equivalent coverage through the NCUA Share Insurance Fund at the same $250,000 limit per member per ownership category.7NCUA. Share Insurance Coverage
Taxes on the Interest You Earn
Interest from a NOW account is taxable as ordinary income in the year you receive it. Your bank will send you a Form 1099-INT if you earned $10 or more in interest during the calendar year.8Internal Revenue Service. About Form 1099-INT, Interest Income Under $10, no form arrives, but the interest is still taxable. Report it on your return either way.