What Is a High-Yield Savings Account?

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Last Updated: 9/2/2023
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A high-yield savings account is a type of bank account that offers a significantly higher annual percentage yield (APY). The national average for regular savings accounts is 0.42%, according to the Federal Deposit Insurance Corporation (FDIC) as of mid-2023. These high-yield accounts allow your money to earn a much higher return, subject to taxation.

High-yield savings accounts are often FDIC-insured, providing extra security for your savings. They offer easy liquidity and storage for emergency funds, especially during periods of low-interest rates. You should be aware of certain limitations, such as monthly transaction caps and possible fees associated with these accounts.

High-yield savings accounts are one of many avenues for growing your money. Depending on your financial goals, risk tolerance, and timeline, other savings or investment options might be more suitable.

KEY TAKEAWAYS ON HIGH-YIELD SAVINGS ACCOUNTS
  • As of 2023, they offer around 4% APY, surpassing the national average of approximately 0.4% APY for traditional accounts, according to the FDIC.

  • Online banks commonly offer high-yield savings accounts, but many traditional national banks and credit unions provide these accounts as well.

  • Banks offering high-yield savings accounts are insured by the FDIC.

  • Some high-yield savings accounts have drawbacks, such as requiring minimum balances or only allowing a limited number of transactions per month.

  • Interest earned on high-yield savings accounts is subject to taxation.

Sources: FDIC: National Rates and Rate Caps, Experian: Pros and Cons of High-Yield Savings Accounts, IRS: Topic No. 403, Interest Received

Benefits and Drawbacks of High-Yield Savings Accounts

High-yield savings accounts, while offering attractive interest rates and safety for your savings, come with their own considerations. You should be aware of the benefits and limitations of these accounts, so you can make an informed decision.

Advantages and Disadvantages

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Advantages

High-Interest: High-yield savings accounts offer significantly higher interest rates compared to regular savings accounts. This means your savings grow faster, maximizing your earning potential.

Compounding Interest: High-yield savings accounts compound interest daily or monthly, allowing you to earn interest on your original deposit and on the interest you've already earned. This can significantly accelerate the growth of your savings.

Easy Access to Funds: You can withdraw or transfer funds relatively easily from a high-yield savings account, making it convenient for unforeseen expenses or short-term saving goals.

Low-Risk Investment: These accounts are a secure way to grow your savings without the risks associated with stocks or mutual funds, making them a safe choice for conservative investors.

Insured by the FDIC: Funds in a high-yield savings account are usually insured up to $250,000 by the FDIC, ensuring your money's safety even if the bank fails.

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Disadvantages

Higher-Yield Options Available: High-yield savings accounts may offer better returns than traditional savings accounts. Depending on your goal, there are better options for high yields, such as the stock market.

Fees: Some high-yield savings accounts may charge monthly maintenance fees, withdrawal fees, or transaction fees.

Limited Transactions: Some banks may limit certain types of withdrawals and transfers from savings accounts per month, which may not suit you if you need frequent access.

Minimum Balance Requirements: Some high-yield savings accounts require maintaining a minimum balance to earn the advertised APY or to avoid monthly fees.

Interest Rate Variability: The high APY offered may not be permanent, as rates can fluctuate with market conditions. You need to monitor your account to ensure competitive returns.

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YOUR SAVINGS EARNINGS ARE TAXED!

Earnings from high-yield savings accounts exceeding $10 are taxable as interest income and reported via Form 1099-INT provided by your bank. Your tax rate depends on your overall income and tax bracket; state or local taxes may also apply. Always consult with a tax professional for personalized advice.

APY Comparison: High-Yield Savings vs. Traditional Savings

Understanding high-yield versus traditional savings requires a closer look at their annual yields. The following table provides a direct comparison, showing how a high-yield savings account can significantly impact your savings growth.

Account Type
APY
Initial Deposit
Pre-Tax Annual Yield

High-Yield Savings

4.35%

$1,000

$43.50

Traditional Savings

0.5%

$1,000

$5.00

FDIC Insurance

According to the FDIC's official website, the insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. This means that if a bank fails, the FDIC will cover up to $250,000 of a depositor's funds in their account.

Recent reports in the news and from certain banks offering high-yield savings accounts suggest that the FDIC's coverage limit may have been raised to $2 million per depositor. This likely stems from the March 2023 banking crisis involving Silicon Valley Bank (SVB) and other regional banks.

The increase in coverage has not been confirmed by an official FDIC statement as of July 2023. Before depositing a significant amount of money into a high-yield savings account, you should contact your bank or a financial advisor for the most current information on FDIC insurance limits.

Best Uses of a High-Yield Savings Account

High-yield savings accounts offer flexibility with better returns whether you’re building an emergency fund, saving for short-term goals, or temporarily holding investment funds.

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    Emergency Funds

    The higher interest rate allows your emergency fund to grow; the liquidity of the account means you can access your funds quickly for unexpected expenses, like medical bills or sudden unemployment.

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    Short-Term Savings Goals

    Choosing a high-yield savings account for short-term goals such as a vacation or gadget purchase can be a good option. You'll receive a higher return compared to a regular savings account and avoid stock market volatility.

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    Holding Account for Investment Funds

    If you are still undecided about where to invest, you can put your money in a high-yield savings account temporarily so it earns a high-interest rate while you determine the right investment.

How to Open a High-Yield Savings Account

Opening a high-yield savings account can be a straightforward process. Follow these general steps towards earning higher interest on your savings:

1

Do Your Research

Research and compare different financial institutions that offer high-yield savings accounts. Look at the APY, fees, minimum balance requirements, and other terms to find the best fit for your financial goals.

2

Prepare Your Information

Prepare your personal information, such as your Social Security number, a valid form of identification (like a driver's license or passport), and your contact details.

3

Open Your Account

Depending on the institution, you can open an account online or visit a physical branch. Fill out the application form with your personal information.

4

Fund Your Account

After approval, fund your new high-yield savings account by transferring an initial deposit or setting up a direct deposit.

Who Should Consider a High-Yield Savings Account?

High-yield savings accounts offer significant advantages to various savers. Whether you're new to saving, building an emergency fund, or setting money aside for short-term goals, the benefits are compelling.

New investors: For those just starting to save or invest, a high-yield savings account provides a low-risk option to start growing wealth.

Emergency fund builders: People setting aside money for an emergency fund would benefit, as the account's liquidity allows quick access while accruing interest at a high rate compared to a traditional savings account.

Short-term goal savers: Those saving for short-term goals, like a vacation, a phone or laptop upgrade, or a down payment for a house, would benefit from the higher return without risking their funds on volatile investments.

Investment options

Alternatives to High-Yield Savings Accounts

While high-yield savings accounts offer attractive benefits, there are other options. Money market accounts, CDs, T-bills, or even the stock market may be suitable alternatives depending on your goals and risk appetite.

Alternatives
Description

Money Market Accounts

This may be useful for new investors. Similar to high-yield savings, these offer higher interest rates and permit check-writing and debit card access, providing flexibility.

CDs require a fixed sum of money for a fixed period (like 6 months, 1 year, or 5 years), often yielding higher interest than savings accounts, but early withdrawals may incur penalties.

Treasury Bills (T-Bills)

T-bills may be useful if you have a large cash balance. These government-backed short-term investments are almost risk-free and exempt from state and local taxes, but their returns may be lower than those of high-yield savings accounts.

Stock Market

Investing in individual companies, exchange-traded funds, or mutual funds could potentially offer higher returns, though the risk is greater and it's generally better suited for long-term goals.

Bonds

Bonds are a way to lend money to corporations or governments in exchange for periodic interest payments plus the return of the bond's face value when it matures, albeit typically lower than equities.

High-Yield Savings Account FAQ

About Nathan Paulus


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Nathan Paulus is the director of content marketing at MoneyGeek. Nathan has been creating content for nearly 10 years and is particularly engaged in personal finance, investing, and property management. He holds a B.A. in English from the University of St. Thomas Houston.


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