What Is a High-Yield Savings Account?
As opposed to a regular savings account, a high-yield savings account features a higher interest rate and generates more returns. Interest rates on high-yield savings accounts can be between 10 and 20 times higher than the national average for standard savings accounts.
Read on to learn more about what a high-yield savings account is, its benefits and drawbacks, plus other information on how to get one and take advantage of it.
What you should know about high-yield savings accounts
- The main difference between traditional savings accounts and savings accounts with high interest rates is that the latter will allow you to earn much more interest. If you’re planning on setting money aside for long-term financial goals, a high-yield savings account will help you get there faster with better returns.
- While an annual percentage rate (APR) takes into account how much your savings account will earn during the year, it doesn't take into account compound interest, which is any interest you'll earn on your accrued interest. An annual percentage yield (APY), on the other hand, gives you a more complete picture, as takes into account your savings account rates as well as the compound interest. The higher your APY, the higher your returns.
- Your APY will not be a static figure and could fluctuate due to factors such as market conditions. If the economy is doing well, your APY can go up. In a recession, though, your APY might take a dive.
Importance of high-yield saving accounts
A high-yield savings account is a safe place to deposit money to earn a competitive yield. Unlike other methods of generating returns, such as investing in the stock market, putting your money in a high-yield savings account poses little to no risk.
Saving money is a smart way of safeguarding against unforeseen circumstances. So, who would be an ideal candidate for a high-yield savings account? “Everyone is a great candidate,” says Emily Shallal, Senior Director of Innovation and Strategy at Ally Bank. “If you're going to hold cash, you want to seek out a bank that has consistently competitive rates to maximize earnings on that cash,” she added.
A 2022 report by the Consumer Finance Protection Bureau found that 63% of Americans have zero to less than a month of expenses in their savings, leaving them vulnerable to emergencies. This statistic underscores the importance of saving. With high-yield savings accounts, you have the potential to earn money while you save money. “[Your savings] could be a significant chunk of funds, so you don't want it just sitting around, earning nothing,” says Marianela Collado, certified financial planner and CEO of Tobias Financial Advisors. “The idea is to house those savings in an account that's paying you some yield.”
To ensure that your money is protected, it’s important only to consider banks or credit unions that are members of the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). These federal agencies protect your money against any potential bank or credit union failures, making sure you don’t lose a dime.
Differences between traditional and high-yield savings accounts
As you consider the type of savings account that’s right for you, it’s helpful to explore the differences between high-yield and regular savings accounts. There’s an overview of this in the table below.
|Traditional Savings Accounts||High-Yield Savings Accounts|
|Interest Rates||0.39% as of April 2023, per the FDIC||Around 3% to 4%|
|Minimum Balance Required||Typically $300 to $500 to avoid service fees||Can range from $0 to $1,000 or more, depending on the bank|
|Fees||$0 unless the account balance falls below the minimum threshold||Varies — some banks charge none, while others charge withdrawal and transfer fees if you exceed the monthly limit|
Benefits of high-yield savings accounts
There are several reasons why you may wish to open a high-yield bank account.
Higher interest rates
High-yield savings accounts offer substantially higher interest rates than traditional savings accounts. Rates can vary based on actions taken by the Federal Reserve and the Fed Chairman to curb inflation — typically via high interest rates — and spur economic growth — via low interest rates. Nonetheless, you can typically expect to earn around 10 times more interest with a high-yield account. This can make it much easier to achieve any personal finance goals you may have.
High-yield savings accounts typically have no or low fees. Some banks may charge a fee for excessive withdrawals, but many have no limits.
Since you won't be using money from a savings account regularly, you won’t need to worry about things like overdraft and ATM fees. If you consistently meet the minimum deposit threshold, you may never have any fees for your high-yield savings account.
When selecting a high-yield savings account, make sure you choose a bank that’s FDIC insured. Financial institutions that are members of the FDIC provide up to $250,000 in insurance to cover any of your funds that the bank may lose through no fault of your own. For example, the bank may purchase government bonds that later have to be sold at a loss or lend cash reserves to borrowers who can't pay their balances.
You may even be able to qualify for more than $250,000 in total FDIC insurance coverage by holding some of your funds in a regular account and some in a high-yield savings account. However, policies dictating which accounts qualify for FDIC insurance vary from bank to bank.
High-yield savings accounts tend to be more flexible than alternative vehicles such as high-yield CDs (certificates of deposit). Unlike with CDs, you’re typically free to withdraw a large amount of your account balance at any time, provided you remain above the minimum balance threshold and don’t go over any monthly withdrawal limitations.
Drawbacks of high-yield savings accounts
When considering whether to open a high-yield savings account, it’s equally important to know some of the potential drawbacks.
The Federal Reserve targets an annual inflation rate of 2%. This means that if your money doesn’t increase in value by at least 2% annually, you’re technically losing purchasing power. Recently, it has been particularly hard to keep up with inflation, with rates at 5% for 2023.
Even the best high-yield savings accounts won’t always offer a rate that exceeds inflation, especially when inflation is running higher than normal.
That being said, there aren’t many great alternatives to high-yield saving accounts. To reliably beat inflation, you may need to lock your money up in long-term bonds or assume risk by buying equities. The former have limits on accessing your cash, however, and the latter entail a certain level of risk.
Either may offer a high enough upside to reliably beat 2% inflation annually, but at a cost. Each carries risk, whereas high-yield savings accounts typically don’t as long your balance is FDIC insured.
Interest rate changes
The interest rates offered by high-yield savings accounts fluctuate based on current financial conditions and associated changes in policies set by the Federal Reserve. Because of that, the rate you’re offered when signing up for a high-yield account may not be the rate you receive long term.
High-yield savings accounts tend to offer higher interest rates when the federal funds rate is higher and lower interest rates when the federal funds rate is lower.
Online banking only
Many of the most popular high-yield savings accounts are available through online banks. This can be a drawback if you’re used to going into your physical bank whenever you need assistance.
With an online savings account, your service options will be more similar to what you receive from credit cards than a full-service bank. For example, you won't likely have physical branches you can go to, and it could be challenging to form a relationship with your provider. However, some online providers such as Capital One are blurring this line by offering physical banking branches in certain locations.
Some high-yield accounts place restrictions and limitations on how you can access your funds. This can include only being able to withdraw or transfer funds out of the account once or twice per month. There may also be an upper limit on the total monthly sum that you’re able to transfer out of your account.
Accessibility varies significantly across high-yield saving accounts and providers. You can sometimes earn a higher rate by agreeing to more restrictions.
How your high-yield savings account can serve you
A high-yield savings account can serve a variety of functions. Carefully consider your goals regarding your savings and whether they are short or long term. The following are some of the most common uses for high-yield savings accounts:
How much money to save in an emergency fund depends on each household. Experts agree that six months’ worth of expenses is the way to go. Should you lose your employment, half a year will allow ample time to find a new job.
Mortgage down payment
Depending on the type of home loan, you may be required to pay between 3.5% and 20%. Saving up with the help of a high APY can help you reach your goal faster.
Tax reserve funds
For freelancers and self-employed workers, it’s smart to set money aside every month to cover taxes. Even if you’re not a freelancer, but are expecting a big tax payment, saving money toward that obligation can soften the blow by earning interest over time.
Big family getaways can require a lot of planning and spending. With a high APY, it could take less time to gather the funds for your vacation.
Other big purchases
Buying a new car, fixing your current one and even investing in long-overdue home improvements require funds. For these purchases, making a solid financial plan that involves a high-yield savings account may remove some of the strain.
How to get returns from your high-yield savings account
A high-yield savings account offers key benefits, from the opportunity to make your money grow over time with little risk to the federal government’s protection of that money. That’s why savings accounts should be regarded differently than checking accounts.
The following are some best practices to get the most out of your account:
- Keep an eye on your APY. Monitor your yield regularly to make sure it’s not decreasing without your knowledge.
- Keep withdrawals to a minimum. If you can avoid it, do not make withdrawals that will deflate your account’s ability to generate earnings.
- Never fall below the balance requirement. Doing so might result in a fee, further eroding the prospects of gaining decent returns.
- Automate your deposits. Start small and once you get comfortable, slowly increase the amount. In time, you might even forget these automated deposits are happening in the background and working to your benefit.
Regarding automation, setting up monthly deposits to your high-yield savings account is a smart way to see a consistent increase in balance and returns. “If you can set it and forget it, you make a decision once that continues to pay in perpetuity,” says Shallal. “It is the most essential thing for a savings strategy. Just making that one solid decision to take action today pays off materially for people.”
Savings can be hard at first, but once you adjust your budget and grow comfortable with setting money aside, you will begin to reap the benefits of a high yield. If you consider your savings an emergency fund, try not to make withdrawals unless you’re faced with an actual emergency. “The idea is that you're not touching [your savings] unless you absolutely need to, like if your roof breaks and you need to get it repaired right away,” says Collado. “The idea is to not touch [your savings]. That's why they're paying you that yield.”
How to open a high-yield savings account
Opening your high-yield savings account should be a simple and fast process that you can do online. Here’s how:
- Start by making sure you have personal identifying information at hand, including your Social Security number and driver’s license, as well as your checking account numbers if you wish to link it with your savings.
- Visit the bank’s website and fill out any requested information, such as your address, date of birth and employment status.
- Make your first deposit and set up recurring direct deposit, if you want. Then, start enjoying higher interest rates.
High-yield savings accounts FAQs
What are the differences between traditional and online banks?
Traditional banks with brick-and-mortar branches can be a better choice for those who prefer face-to-face assistance and being able to deposit and withdraw cash. That said, their return rates tend to be lower than those offered by online banks.Whereas online banks don't have physical locations, they offer the convenience of banking from a computer or mobile device. And while their limited (or nonexistent) ATM network can be a deal-breaker for some, banking quickly and getting more returns can outweigh the cons.
What should you look for when considering a high-yield savings account?
When shopping for financial products, pay attention to the fine print. At a glance, a lot of high-yield saving accounts look similar, but it's smart to dig deeper and get more information on the following:
Are there any fees associated with high-yield savings accounts?
There can be several types of fees associated with a high-yield savings account — outside of any new account opening deposit amount requirement. For example, you may have to pay monthly maintenance fees if you don't meet the minimum amount balance requirement.
You may also have a debit card attached to your account if you choose a provider like Marcus by Goldman Sachs® or Synchrony Bank (Member FDIC). Using that debit card could carry overdraft and ATM fees, as could making wire transfers from the account.
Finally, you may also encounter short-term withdrawal charges if you attempt to transfer money out of the account too many times in one month. However, all these fees vary from institution to institution, which is another reason why it's important to do your research before choosing.
Is the interest earned on a high-yield savings account taxable?
Yes, whether you open an account with Discover, Chase, American Express or any other bank, the interest you earn from a high-yield savings account is taxed the same as income is. This can eat into your rate of return.At the end of each fiscal year, your institution will send you a 1099-INT form, which tells you the amount of interest you made from the account throughout the year. You then report the earnings from your interest savings to account to the IRS and pay taxes on it based on your income bracket and the state you live in.
How do high-yield savings accounts work?
High-yield savings accounts offer a higher APY than traditional accounts. These accounts bring cash reserves to the bank through the superior rates they offer. This helps the institution earn more money by providing more funds to loan out to other customers, which it will then earn interest on.For example, a bank may offer a 3% annual interest rate through a high-yield savings account. But it may go on to loan a percentage of those funds out to other customers for rates of 5% or more.
Can I lose my money in a high-yield savings account?
High-yield savings accounts are less risky and more flexible than most alternatives that offer similar interest rates. However, it is still possible to lose money with a high-yield savings account, and it's important to be aware of that before transferring your savings into one of these accounts.
There are two main ways you have the potential to lose money. The first is that you could lose out to inflation. If the rate of inflation increases by a higher percentage than your annual interest rate, then you'll lose purchasing power even though you're still earning more interest than you would from a traditional account.You can also lose money if you have more cash in a high-yield savings account than $250,000 — the maximum amount insured by the FDIC. If the bank collapses or mismanages your funds, you may not be able to retrieve any amount over the $250,000 threshold. There may only be a small chance of this happening, but it's still a risk you should know about.