Watch Out for These 3 Downsides of Checking Account Bonuses

Some banks and credit unions offer significant bonuses when you open a new checking account. Some of the best bonuses we've seen are $300 or more, up to $600. And all you have to do is open a new checking account and meet some minimum standards for how you use the account.

But if you're thinking about opening a new checking account for a bonus, be careful. This bonus cash is not just free money. If you get checking account bonus money, you need to abide by bank rule fine print and be prepared to pay a little extra on your taxes.

Let's look at three potential downsides of checking account bonuses -- and how you can navigate them.

1. Bank rules often require minimum deposits

Banks aren't just giving money away for free -- there are a few strings attached. By offering new checking account bonuses, banks are trying to find new customers. They want you to deposit cash, keep money in your bank account, and be willing to open a larger banking relationship over time.

With that in mind, be sure to read the fine print of your new checking account bonus offer. For example, some of the best bonuses might require you to:

• Make minimum direct deposits of a few thousand dollars
• Keep your account open for at least 90 days
• Maintain a minimum balance of a few thousand dollars (or more) in your new account or across multiple accounts

If you can't meet the requirements of your new account, you won't get the bonus. Make sure you understand the direct deposit rules in particular. Some new account bonuses only require a one-time direct deposit, while others need multiple direct deposits over several months. You might need to switch your payday direct deposits to the new bank account to qualify for the bonus.

2. Bank fees can eat up your bonus

Many of the banks that offer big checking account bonuses also charge monthly account fees. For example, if a bank offers a new account bonus of $300, but charges account maintenance fees of $10 per month, after one year, you'll have lost $120 to fees. If you're not careful, bank fees can gobble up nearly half of your bonus money.

Fortunately, there are usually a few easy ways to avoid these monthly account fees. For example, many banks will waive the fee if you make monthly direct deposits or keep a minimum balance in your bank accounts (such as a checking or savings account). Be sure to understand the bank fees and rules before you open your new account.

3. You have to pay taxes on your checking account bonus

New bank account bonuses are not tax-free money. You will have to report this extra cash as income on your tax return. Your bank will send you a 1099-INT form (the same form used to report interest income) that you can use when you file your taxes.

Depending on what tax bracket you're in, you might want to set aside a bit of cash from your new checking account bonus. For example, if you're in the 22% marginal tax bracket, a $400 bank account bonus would require you to pay an extra $88 in taxes.

Bottom line

Opening a new checking account for the bonus money can be a good deal, and worth doing. If you've been thinking of switching banks, getting a new account bonus can be an extra incentive to sweeten the deal. But make sure you understand the rules, possible account fees, and tax implications. Checking account bonuses are not "free" money. Read the fine print to make sure you keep most of that money in your bank account without losing too much of it to taxes or fees.