What Is a High-Yield Savings Account?

Considering the national average annual percentage yield (APY) for typical savings accounts is 0.45% (as of 10/21/24), earnings from traditional savings accounts are not exactly lucrative. The good news is there are high-yield savings accounts that offer much higher APY than regular savings accounts.

Whether you’re stashing away money for an emergency fund or a big purchase, here’s why you might consider having a high-yield savings account in your arsenal.

What is a high-yield savings account?

A savings account is a bank account designed to help you save money, unlike a checking account which is meant to help you conduct transactions. Also known as high-interest savings accounts, high-yield savings accounts are bank accounts that work similarly to traditional savings accounts but offer a higher interest rate. This difference can be huge since a higher APY means you’ll get a better return on your money.

For example, let’s compare a traditional savings account that earns 0.50% APY to a high-interest savings account that earns 4.00%.

Let’s say you’re like me right after college. I had about $5,000 saved up, and I was just learning about high-yield accounts and debating which type of savings account to open. Assuming I didn’t make any additional deposits, here’s how much I was looking at earning with each type of savings account over the course of three years:

• Regular savings account with 0.50% APY: $5,075.38
• High-yield savings account with 4.0% APY: $5,624.32

That’s a pretty significant difference — needless to say, I chose the high-yield account. It’s also important to note that the gap would be even wider if I kept making additional monthly deposits and left the money there over a longer period of time.

High-yield savings accounts we recommend

Our list of the best banks contains several financial institutions that offer savings accounts with high annual yields. Here are some of our recommendations:

Bank account	APY	Minimum balance	Monthly service fee	Learn more
CloudBank 24/7 Savings	4.577	$0	$0	Visit CloudBank 24/7
SoFi® Savings	up to 4.20% with direct deposit3	$0	$0	Visit SoFi®
Varo Online Savings	5.00% (as of 07/01/24) with direct deposit	$0	$0	Visit Varo
Wealthfront Cash Account8	5.00%	$0	$0	Visit Wealthfront
CIT Bank Platinum Savings	4.55% 9	$0 (balances under $5,000 earn a lower APY)	$0	Visit CIT Bank

The pros and cons of a high-yield savings account

Before you sign up for a high-yield savings account, it’s best to learn about the advantages and disadvantages:

Pros

• Accessibility: Most high-yield savings accounts are offered by online banks and are typically accessible online or via a mobile banking app, making it easy to transfer and deposit money. You can perform pretty much all your transactions online, including opening new accounts, making ACH (Automated Clearing House) transfers, and more.
• A higher rate of return: Since overhead costs for online banks are lower, they’re able to pass on their savings to you by way of a higher interest rate.
• Lower fees: Most high-yield savings accounts don’t charge monthly maintenance fees or other service fees commonly found with traditional savings accounts.

Cons

• Limited features: Not all high-yield savings accounts are the same. Some may not offer features like ATM access or a debit card, meaning you’re limited to depositing and withdrawing funds via ACH, direct deposit, wire transfer, or requesting a check.
• Longer wait for funds: Since your options may be limited to online transfers, you may have to wait a few business days for these types of transactions to process. It’s not exactly helpful if you need cash right away.
• You can’t access a branch: Since most high-yield savings accounts only offer online banking, that means you can’t go in person to do your banking. If not being able to visit a brick-and-mortar bank is a dealbreaker, then you’ll need to consider another option.

One thing to be aware of with all savings accounts, not just high-yield accounts, is that you will be limited in the number of withdrawals you can make. To me, this is actually a positive. I don’t want to be able to take money out of my savings all the time; I want to really think if I need that money before I withdraw it from my account.

Federal Regulation D, a rule established by the Federal Reserve, limits certain deposit accounts, like savings accounts and money market accounts. If you want to be able to move your money around more often, then your best bet is to put some of it into a checking account.

Can you lose money in an HYSA?

The short answer is no, you can’t lose your money.

The longer answer is that high-yield savings accounts offer the same types of security as regular savings accounts. In other words, your savings account is either insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000.

You can ask the bank or credit union if it’s FDIC- or NCUA-insured — or check through the FDIC’s BankFind or the NCUA’s website.

Do you pay taxes on interest?

Any interest you earn in a high-yield savings account is considered taxable income in the eyes of the IRS. According to the IRS, you’ll be taxed on any interest you earn over $10.

Your bank should send you a copy of Form 1099-INT or 1099-OID each year. This form will show the interest you earned in the previous year. Whether or not your bank sends you the form, you’ll still need to report interest earned in your tax return.

Things to look for when opening an HYSA

Comparing different offerings is helpful since many banks offer varying interest rates and features. That way, you can find the best fit for your needs, whether your priority is earning the highest rates or having more convenient access to your cash.

Here’s what you should consider when comparing high-yield savings accounts:

• Fees: I always make sure to first look at what fees I’ll be charged when evaluating savings accounts. Some banks charge maintenance fees that may take a chunk out of your interest earnings. There could also be other monthly fees or charges, such as excess transaction or balance transfer fees.
• Minimum balance amount: Some accounts have minimum balance requirements that mean you need to keep a certain amount in the account in order to earn interest. I would recommend looking for one with no minimum balance if possible so that you don’t have to worry about tracking how much is in your account.
• Initial deposit requirements: Some minimum deposit amounts are higher than others. Ideally, you would find one that offers a low or $0 minimum deposit, especially if you’re just starting out.
• APY: Some high-yield savings accounts offer high interest rates — but only for a certain period of time. Other accounts may have tiered rates, meaning the interest rate can change depending on how much you have in the account. Make sure to do your due diligence and fully understand what your APY will be with any given account.
• Transfer options: Investigate how you can transfer from one bank account to another as well as if you can deposit money via mobile check deposit or ACH transfers.
• ATM access: Does the bank issue a debit card that you can use at an ATM? And, if so, I would make sure to find out which ATM network the bank uses so you can determine whether there are any in your area. There's no use having an ATM card if you don't have any machines around where you can use it.
• Mobile app and website access: Many banks offering high-yield savings accounts also offer apps to help you manage your money or even help you automate monthly deposits. Make sure the bank you're using offers the sort of digital and website access that works best for you. I personally like to look for apps that provide visualizations and savings goals features that allow me to easily keep track of my savings.

FAQs

Bottom line

When it comes to saving money, high-yield savings accounts offer a significant advantage over standard savings accounts. With competitive rates and the power of compound interest, these accounts could help you reach your financial goals faster. While they may have some limitations, the convenience and higher returns they offer make them a compelling option.

When choosing a high-yield savings account, remember to consider factors like fees, minimum balance requirements, and transfer options. Additionally, ensure your account is with a member-FDIC bank for added security. Ultimately, opening a high-yield savings account can be a smart move to grow your money efficiently and work toward important short-term objectives like a down payment or building an emergency fund.