What Is a High Yield Savings Account?
A high yield savings account is a savings account that pays an account holder a higher-than-average interest rate.
If the average US savings account offers an interest rate of 1%, for example, then a high yield savings account might offer a 1.75% to 2% or higher interest rate.
How Does a High Yield Savings Account Work?
A high yield savings account works the same way as a normal savings account, except that it will pay you more interest over time. You can open a high yield savings account with any bank or credit union, either online or at a physical location. The financial institution will ask for identification and typically require you make an initial deposit of $25 to $100 to get the account started.
Once the account is opened and funded, the money you put in it will earn interest (i.e. money the bank pays you, the account holder) over time. The bank or credit union will pay you this interest on a regular basis, usually monthly, quarterly, or semiannually.
You can deposit money into a high yield savings account any time you wish to make your account balance grow. You may also make withdrawals from the account, though you may be limited as to how many times you can take your money out in a given month. The bottom line is, as with any interest-bearing account, the more money you have in your savings account and the longer you keep that money in the account, the more interest you'll earn over time.
Example of a High Yield Savings Account
Let's say you open a savings account at your favorite online bank with an initial $100 deposit. If the savings account offers an interest rate of 2%, typically expressed as an annual percentage yield (APY), and you leave your $100 in the account all year, the bank will pay you $2 in interest (2% x $100 = $2) over the year.
Don't worry, it gets more exciting if you hold more money in the account to let it compound and grow. For example:
- If you opened that 2% APY savings account with $10,000, then you can expect to earn $200 in interest over the year to have an account balance of $10,200.
- If you were to leave that $10,200 in the high yield savings account for another year, you would earn $204 in interest over Year 2 and your balance would grow to $10,404.
- If you were to let your $10,000 stay in the account to compound for a total of 10 years, your original $10,000 deposit would grow to almost $12,200, all without you having to lift a finger.
[See how much your money could grow using our High Yield Savings Account Calculator.]
The key is, the more money you deposit into your high yield savings account, and the longer you keep those dollars in the account, the more interest you'll earn.
How Often Can You Withdraw Money?
You may take withdrawals from a high yield savings account without penalty through an account transfer, an in-person withdrawal, or by using your ATM debit card at a register or ATM.
There are limits to your withdrawals, however. Unlike checking accounts which are designed for on-demand and unlimited withdrawals, high yield saving accounts are limited to six withdrawals per month.
If you're an account holder that exceeds these monthly withdrawal transaction limits, your financial institution may charge you a fee for each transaction over the six-per-month limit. The institution may also ask that you convert the account to a checking account if you consistently exceed the monthly limit.
How to Choose the Best High Yield Savings Account
There are more than 5,000 different banks and credit unions across the US and thousands more across the world, so it's important to know how to shop for high yield savings accounts.
While you may first be attracted to savings accounts that offer the highest APY and thus pay the most interest, it may be wise to also consider which accounts and financial institutions charge the lowest fees and offer the most flexibility to access your money, especially if you plan to use your savings account as an emergency fund.
Here we'll run through the six most important factors to consider when shopping for the best high yield savings account for you:
1. Annual Percentage Yield (APY)
A savings account's APY will show you how much interest you can expect to earn over the course of a year. For example, if you deposited $10,000 into a savings account with an APY of 2%, you can expect to earn roughly $200 in interest in one year's time. If you were to withdraw all of your money after the first six months, you'd get $100 in interest. You can use APY to compare different savings accounts’ advertised interest rates.
2. Compounding Method
Closely related to APY is the financial institution's compounding method for its savings accounts. While it's most common to expect your interest payments on a quarterly basis, some institutions will pay interest monthly, semi-annually, or annually.
This is important because even if two accounts from two different institutions offer the same APY, an account that compounds monthly (more often) will generate slightly more interest than an account that compounds quarterly (less often). In short, the more compounding, the faster your money grows.
3. Initial Deposit
Every bank and credit union will have a minimum initial deposit amount to open a high yield savings account. Some institutions will let you open an account with $0 down with the expectation that you'll fund the account within 30 days, but most will usually ask that you make an initial deposit of at least $25 to $100 to open the account.
4. Minimum Balance
To entice you to keep your high yield savings account as full of cash as possible, banks and credit unions will waive account maintenance fees and offer their most competitive APY as long as your balance stays above the account's minimum balance requirement.
If your account balance dips below that amount in a given month, you may be required to pay a maintenance fee on your account and earn a lower APY on your money until your balance rises above the minimum balance. So before you choose a savings account, be sure the minimum balance on it is something you can maintain (or be ready to pay extra fees).
5. Account Fees
High yield savings accounts may come with monthly maintenance fees or penalties for exceeding the monthly six-withdrawal limit. Fortunately, there are ways to completely avoid these bank fees if you're willing to ask the institution.
6. Withdrawals and Deposits
While six withdrawals per month is allowed by federal mandate for every savings account, some banks and credit unions offer more flexibility than others, which is important if you need quick access to your money in the event of a financial emergency. The most flexible savings accounts offer the ability to make bank-to-bank transfers or ATM card payments and withdrawals. See if the institution allows you to make deposits online and if there are any restrictions (i.e. deposit amount limits) on these mobile deposits.
Best High Yield Savings Account Rates
Putting some of your extra money into high yield savings accounts and money market accounts is a great way to build an emergency fund, set aside money for that dream vacation, or just save up for a big-ticket item.
To help you find the perfect high-interest savings account, we've created a list of The Highest-Yielding Savings and Money Market Accounts in America.
How Often Do High Yield Savings Account Rates Change?
The APY on a savings account can change within days after the Federal Reserve raises or lowers broader interest rates. The financial institution also has the right to change your existing savings account's APY at any time with little notice.
Can You Lose Money in a High Yield Savings Account?
If the savings account is offered through a Member-FDIC bank or NCUA-member credit union, the account is insured for up to $250,000 per account and per cosigner. For example, if you and your spouse are cosigners on a high yield savings account and the bank is in financial trouble, up to $500,000 ($250,000 x 2 cosigners) of your money in the account would be protected from losses.
Do You Pay Taxes on Interest Earned?
All interest you earn from a savings account is taxed the same as normal income in the United States. The institution that pays the interest is required by the IRS to send you a 1099-INT tax document (which reports how much interest you earned from the institution during the tax year) shortly after the end of the calendar year. You are required to report this income when filing your income taxes.
The same applies for sign-up bonuses. So if the bank or credit union gave you a $100 bonus to open a new savings account with them, they'll report that as interest on the 1099-INT tax document, and you will need to pay income tax on that amount as well.
What’s the Difference Between a High Yield Savings Account and a CD?
As we talk about in 5 Things to Know Before Opening a CD, you'll need to ask two questions:
1) “How likely and how soon will I need access to this money (if ever)?”
2) “Do I think interest rates will change drastically in the future?”
While CDs pay higher interest yields they also keep your money tied up for months at a time; high yield savings accounts give you faster access to your money in case of emergencies.
What's the Difference Between a Money Market Account and a High Yield Savings Account?
Both money market accounts and high yield savings accounts are typically FDIC-insured and offer attractive interest rates. There are a few differences however. For example, money market accounts allow you to write checks to take money out of the accounts, while savings accounts offer lower balance minimums.
We go into more detail about this topic in Money Market vs Savings: Which Account is Best for You?