Should You Use a High-Yield Savings Account?

Us: “We have good news and bad news for you. Which would you like first?”

You: “The bad news.”

Us: “The bad news is that interest rates are going to continue to increase in the foreseeable future, and you’ll be paying a higher rate on mortgages, auto loans, credit cards – just about any type of loan you can think of.”

You: “What’s the good news?”

Us: “The good news is if your money has been earning little to no interest in a regular savings account, high-yield savings accounts are paying as much as 4.16% for savers.”

Is this news too good to be true?

No – it’s true. There are numerous online banks and credit unions offering high-yield savings accounts that pay interest rates as much as 20 times higher than traditional savings accounts that you’ll find at your local brick-and-mortar bank.

What is a high-yield savings account?

A high-yield savings account is nothing more than a deposit account that pays a higher interest rate than a traditional savings account. Most high-yield savings accounts are offered online by large financial institutions you may or may not have heard of:

  • American Express
  • Barclay’s
  • Capital One
  • Citibank
  • Goldman Sachs
  • SoFi
  • Popular Direct

and many more.

Many online accounts require no minimum deposit to open an account and no minimum balance to maintain.

How much interest will you earn on $10,000 after one year in a high-interest savings account?

If you keep $10,000 in a high-yield savings account for twelve months and earn a 3.5% APY (Annual Percentage Yield), you would gain about $350 after a year.

That same $10,000 in a traditional savings account would earn you about a 0.20% APY, which would be a gain of about $20 after a year.

Why would someone choose to earn $20 interest instead of $350 interest?

One word: safety. Some people are leery of doing online banking because of cybersecurity concerns.

Are high-yield savings accounts safe?

Yes, they are safe.

Like your savings account down at Bank of America or Wells Fargo, your high-yield account is federally insured up to $250,000 per depositor, and many nonbank high-yield savings account providers partner with banks for insurance.

Accounts at online banks are backed by the Federal Deposit Insurance Corporation (FDIC), while the National Credit Union Administration backs credit unions. This means that even if the financial institution holding your money fails, the government makes sure your money will still be there for you.

Your money is easily accessible in a high-yield savings account. You can access your account online 24/7/365 to make deposits or withdrawals. However, your bank may charge a fee if you make more than a certain number of monthly withdrawals.

How to open a high-yield savings account

Opening a high-yield savings account is easy. You choose an account that best meets your needs and then complete the account opening process with the bank or credit union.

The process is the same, except you’ll probably be doing it online instead of at a branch office near your home or office. The standard information you’ll need to provide will be:

  • Name
  • Address
  • Email address
  • Phone number
  • Date of birth
  • Social Security number

The financial institution may also ask you to upload a copy of a government-issued photo ID. A credit check is typically not required.

After you complete the account-opening process and your account is open, you can fund it by linking it with an existing bank account using your account number and your bank’s routing number. Once the accounts are linked, you can transfer money and make your initial deposit.

A high-yield savings account is not a good fit for retirement savings

If you’re considering putting your money into a high-yield savings account instead of an IRA, you’ll want to rethink that.

Unlike some IRAs, deposits into high-yield savings accounts are not tax deductible, and the interest earned is not tax-deferred. With a high-yield account, you’ll receive a 1099-INT each year, which will tell you how much interest you earned during the tax year. Depending on your situation, you will probably have to pay income taxes on the interest you earned.

The Bottom Line

If you have money sitting in a traditional savings account and are dissatisfied with the low interest your money is earning, especially as interest rates are rising, consider moving at least part of your savings to a high-yield savings account.

It’s safe, insured, and accessible, and you can earn a substantially higher return on your deposit than with a regular bank savings account.

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Bob P