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- High-yield savings accounts and regular savings accounts are both federally regulated and liquid.
- The main difference is that high-yield savings accounts can earn up to 12 times more in interest.
- Some of the most competitive high-yield savings accounts are offered by online banks.
A savings account is a good place to save money for short-term goals like a down payment, car, vacation, or emergency fund.
But a high-yield savings account will likely be a stronger choice for storing your money than a traditional savings account.We'll explain how these two types of accounts compare.
Understanding high-yield savings accounts
Definition and overview
A high-yield savings account is a bank account that earns a competitive interest rate.
You can see how much a high-yield savings account earns by checking the annual percentage yield (APY). This is expressed as a percentage and shows you how much you can earn in a year.
High-yield savings accounts are just as liquid as any other savings account, and your funds are not invested, making them a good place to put any money that you want to grow but will need in the next few years.
How they differ from regular savings accounts
High-yield savings accounts have essentially the same features as any other savings account. Both types of accounts share the following features:
- Are structurally the same
- Are federally regulated and offer FDIC or NCUA insurance
- May limit withdrawals to six times a month, though the cap is no longer federally mandated
- May require a minimum opening deposit or minimum daily balance
- Can be used for short-term savings goals
Note that high-yield savings accounts and high-yield checking accounts are not the same and are best used for different purposes.
Benefits of high-yield savings accounts
Higher interest rates on accounts
Some of the best high-yield savings accounts pay around 5% APY. Meanwhile, the average savings rate in the U.S. is just 0.45% APY, according to the FDIC. Hence, traditional accounts earn so little that a high-yield account earns around 9 to 12 times more interest.
For example, if you had a $10,000 emergency fund and transferred it into a high-yield savings account with 5% interest, compounding daily for five years, you'd earn about $2,840 in interest alone. Leave it for 10 years, and that $10,000 would grow to around $16,486 in total.
Back in a regular account earning 0.05% interest, that same $10,000 would have only earned $50.82 over 10 years.
Safe and secure savings
High-yield savings accounts that are FDIC-insured at a bank or NCUA-insured at a credit union are completely risk-free, just like regular savings accounts and checking accounts.
This federal insurance protects up to $250,000 in an individual account, or up to $500,000 in a joint account, in the event of a bank or credit union failure. If your savings exceeds the coverage limits at your institution, you can consider moving the excess savings to a new account at a different institution, where you will have an additional $250,000, or $500,000, in coverage for that account.
Easy access to funds on savings
For money you're setting aside for an emergency or a specific savings goal, a high-yield savings account is best. Depending on the bank, you may be permitted to make withdrawals at any time for no fee, though you likely won't have a debit card. In order to initiate a transfer, you'll typically need to do it via your online account or visit a bank branch.
Note that some banks still enforce a pre-COVID withdrawal limit of six times per month, charging a fee of up to $10 for each transaction over that limit.
Limitations of high-yield savings accounts
Fund transfers for savings
Money that you need daily access to should be kept in a checking account. Checking accounts usually have debit cards so you can access your money. Some banks may also have ATM cards or debit cards for high-yield savings accounts, but this isn't common.
Choosing your bank when opening a high-yield savings account also matters. Some high-yield savings accounts accept cash deposits, while others don't. Some banks also don't have checking accounts. If the bank only has savings options and you can't withdraw cash from your savings account, you'll have to transfer money to an external financial institution, which may take more days to process.
Tax implications for high-yield savings accounts
Since you're earning interest in a high-yield savings account, that's taxable. You'll have to take that into account when filing your tax return.
Savings account interest is taxed as ordinary income, so the tax rate you have to pay depends on your current federal income tax rate.
Banks send a 1099-INT form by mail at the beginning of the year so you can factor in savings account interest in your tax return. You'll still have to include this information in your tax return even if you don't receive it.
The interest you'll earn on a high-yield savings account usually isn't enough to significantly impact your tax return, unless you keep a substantial savings balance.
Features to look for in a high-yield savings account
Interest rate
While high interest rates are the main draw of high-yield savings accounts, it's important to note that they're subject to change. When the Federal Reserve raises or lowers its federal funds rate, rates on deposit accounts can go up or down.
Though it's tempting to choose the account with the highest interest rate, it's critical to also consider the bank's reputation, as well as any account fees and requirements, since the rate will fluctuate.
Minimum balance requirements
Some savings accounts, especially those with highly competitive rates, will require you to keep a minimum amount of money in your account at all times in order to earn the advertised APY.
Fees and charges
There are plenty of high-yield savings accounts that charge no monthly maintenance fee, but there may still be charges for things like excess withdrawals and ATM usage. Be sure to read through the financial institution's fee schedule.
Account accessibility
Consider how you'd like to access your money, whether in person or online.
Banking with a traditional bank or local credit union means you can typically walk into a physical branch to withdraw or transfer money. If you're tech savvy and won't need to frequently withdraw cash from your savings account, an online bank may be a better fit.
If you like checking your account balance or transferring money from your phone, check whether the financial institution has a mobile app and read through the reviews.
How high-yield savings accounts compare to other savings options
You don't only have to choose between a high-yield savings or a traditional savings account. Banks also have other types of savings accounts, like money market accounts and CDs.
If you prefer greater account accessibility, a money market account may be a better fit than a high-yield savings account. Money market accounts typically offer check-writing privileges, ATM cards, debit cards, or a combination of these services. These accounts are on par with the rates offered by high-yield savings accounts, although they are more likely to have monthly service fees or tiered interest rate structures.
If you'd like to open an account with a fixed interest rate, you might choose a CD over a high-yield savings account. However, keep in mind that CDs require you to make one upfront deposit and then maintain money in the account until the term ends. If you take money out, you'll pay an early withdrawal penalty. You also can't make additional deposits unless you open an add-on CD.
How to open a high-yield savings account
Choosing the right bank
There are lots of high-yield savings accounts to choose from, mostly from online banks. These institutions don't have to manage physical branches and therefore generally offer better rates and minimal fees compared to traditional brick-and-mortar banks.
Minimally, your bank should have FDIC insurance. If you go with a credit union, be sure it has NCUA insurance. These coverages protect your money — up to $250,000 per depositor, per account type, per institution — in the event of a bank or credit union failure. Online banks may even offer up to $1 million in FDIC insurance because they partner with multiple banks to store your money.
Required documents and steps
Most banks will allow you to open a high-yield savings account online.
A high-yield savings account application will ask for personal details, including your legal name, Social Security number (or a Taxpayer Identification Number for immigrants and non-U.S. citizens), photo ID, date of birth, home address, phone number and email address.
High-yield savings account definition FAQs
A high-yield savings account is a savings account with a competitive interest rate. Regular savings accounts pay an average of 0.45% APY, while many high-yield savings accounts offer rates of 4.25% or higher.
It works like a regular savings account but earns interest that is deposited into your account monthly, growing your balance.
Yes, they're as safe as regular savings accounts thanks to FDIC and NCUA insurance that protects your money (up to $250,000 per account type and per institution) in the event of a bank or credit union collapse.
You can access your money anytime. However, some banks limit how many times you can make withdrawals each month and charge a fee for each additional transaction.
You will need to provide basic identification and contact information, including your Social Security number. If you're a non-U.S. citizen or immigrant, you will be asked to provide alternative documentation.
