A high-yield savings accounts typically earn annual percentage yields (APYs) that are much higher than standard savings account—up to 25 times the national average. Online banks typically provide the best high-interest savings accounts. Savers who aren’t adverse to internet banks can stand to earn the highest interest rates on savings accounts can offer.
High-yield savings accounts are some of the best savings accounts available because of their robust interest rates and fewer account costs. For example, CIT Bank offers a high-interest savings account that earns an APY of 1.75% or more. Although it’s an online bank, it requires only a minimum deposit of $100 and has no monthly maintenance fees.
What Is a High-yield Savings Account?
A high-yield savings account is a savings account that earns a higher interest rate or APY than traditional savings accounts. These high-yield savings account rates typically range between 1% APY and 2% APY but can earn even more. Comparably, traditional savings account rates range from 0.01% APY to 0.20% APY.
Money market savings accounts are similar to high-yield savings accounts. However, money market accounts and high-yield savings are typically structured differently. For example, owners can order and write checks on a money market account, similar to a checking account. However, checks can’t be ordered on a savings account. For the purposes of this article, money market savings accounts are not included when referring to “high-yield savings accounts.”
Higher interest rates mean a higher return on your funds, and the difference in return can be significant. For example, if you make a $5,000 deposit at a minimum traditional savings rate of 0.06%, with interest that compounds monthly, you’ll earn $3 by the end of the year. In comparison, that same $5,000 savings deposit calculated with a high-yield interest rate of 1.60%, will earn $80.59 by the end of the year.
Savings Account Type
Final Balance (Deposit + Interest Earned)
Who a High-yield Savings Account Is Right For
High-interest savings accounts are a good fit for people looking to save money for a variety of reasons, including long-term and short-term financial goals. People looking to earn higher APYs compared to traditional savings accounts, while still having access to funds, should consider a high-yield savings account.
High-yield savings account are right for people who want to:
- Meet short-term savings goals: Whether for a trip or vacation, the best way to save is to earn the highest APY. High-interest savings accounts can help meet financial needs by earning additional funds on your deposit.
- Meet long-term savings goals: Save money for college tuition, car repairs, and collect funds while on deposit. The longer funds are held in a high-interest savings account, the higher the return on interest will be.
- Save for emergencies: Even if you have no particular goal in mind, it’s good to have high-interest savings for emergencies.
- Open an online bank account: Most high-yield savings accounts are held at online banks.
- Secure business funds: Business owners looking to set aside funds for future business expenses will do well with a business high-yield savings accounts. You can easily open a business bank account in just a few steps.
Although there are traditional banks or credit unions that offer high-yield savings accounts, online banks offer the majority of accounts available. However, if you have accounts at a traditional bank, you can easily transfer funds to an online bank to fund a new account.
How a High-yield Savings Account Works
High-yield savings accounts function like traditional savings accounts with the main difference being the APYs. Online providers usually operate high-interest savings accounts and tend to be more forgiving about the minimum balance requirements. These accounts can require minimum balances as low as $50. Additionally, some accounts don’t require a minimum average balance.
Here are four important things you should know about these accounts:
- Minimum deposit: The financial institution may require a minimum initial deposit. Opening deposits typically range from $10 to $2,500, and you may need to maintain that balance for a period of time.
- Minimum balances: A majority of high-interest savings accounts require a minimum average balance to avoid a monthly service fee. Minimum average balances typically range from $100 to $2,500.
- Interest rates: Interest rates are determined by the financial institution and are based on the account and bank terms. High-interest savings accounts are most often compounded daily or monthly, but interest can be calculated on a quarterly, semiannual, or annual basis as well.
- Regulation “D”: Federal Regulation D limits the number of monthly withdrawals to six. Withdrawals that qualify under Regulation D include: third-party checks, ATM withdrawals, debit card purchases, electronic transfers (including overdraft transfers), automated clearing house transfers (ACHs), phone transfers, wire transfers (made by phone or online).
Withdrawals made over-the-counter at a branch location aren’t usually considered Regulation D transactions. If you exceed the number of allowed savings withdrawals, your transaction could be declined, or the bank may charge your account an excessive transaction fee of up to $25. Additionally, if you make too many withdrawals in a year, the bank may automatically convert your savings account into a checking account.
High-yield Savings Account Costs
- Monthly service fee: A monthly account fee, applied when you don’t meet the required average minimum balance. Fees usually range from $10 to $25.
- Transaction limit fee: Fee charged when you make more than the allotted six withdrawals from the savings account each month. Federal regulation restricts savings withdrawals and fees usually range from $10 to $20.
- Wire fee: A per-transaction fee on outgoing and incoming wires. Outgoing wire fees typically range from $10 to $39 and incoming wire costs range from $5 to $15.
- ACH fee: The per-transaction cost on outgoing incoming ACH transfers. Fees for outgoing ACH transfer are typically $10 to $15 and $3 to $10 for incoming ACH transfers.
- ATM fee: A fee assessed by either the issuing bank or non-issuing bank when you use an out-of-network ATM. Fees can range from 75 cents to $5 for each transaction.
- Dormant account fee: A fee charged for inactivity on the account, usually a period of one to five years of inactivity. Fees usually range from $10 to $25.
Since most high-yield savings accounts are offered through online banks, you may encounter more out-of-network ATM fees than with a traditional bank. Most of these fees come from the non-provider banks and many high-interest savings account providers refund some to all of these fees. If you need more than six savings account withdrawals each month, you would do better with an interest-bearing online checking account instead.
How to Choose a High-yield Savings Account
The APY is one of the most important factors to consider when choosing a high yield savings account, but it’s not the only one. High-yield savings accounts are more than just a way to save money, they offer a chance to maximize your savings and meet your financial goals quicker.
- Interest rates: The best high-yield savings accounts offer interest that’s up to 25 times more. Savers looking for generous interest rate returns should consider an account that offers at least 15 times the national average.
- Compound frequency: Typically, interest that is calculated more frequently will provide a higher return. However, if you opt for the highest APY regardless of the compound method, the compounded interest will already be included.
- Bank fees: Some high-yield savings accounts, including high-interest, come with various fees, which can include monthly service fees. You may also encounter membership fees if you open a high-interest account with a credit union.
- Minimum requirements: Some high-interest accounts have a minimum balance requirement for earning the account’s top APY. If you can’t keep the minimum balance, it may be better to choose an account with a lower balance threshold.
- Transaction options: Easy access to funds through a physical branch may eliminate the need to make excessive transactions on the account. Transaction terms vary from bank to bank, so you’ll need to decide how often you will need access to funds and determine if that account can accommodate that.
It’s common for high-yield savings accounts to require a minimum opening deposit or minimum average balance for fee-free banking. Review your account details to understand the provider’s specific conditions before opening an account.
High-yield Savings Account Providers
High-yield savings accounts can be found at traditional banks, credit unions, and online-only financial institutions. However, most traditional banks do not offer interest rates that are even close to what internet banks and credit unions offer.
1. Online Banks
Online banks are typically the providers that offer top-tier high-yield savings accounts. These banks don’t have the overhead and costs that traditional banks do, so they are able to offer significantly higher interest rates as a result. Online banks are also usually insured by the Federal Deposit Insurance Corporation up to the federal limit, just like traditional banks. Plus, they’re transparent about interest rates and it’s easy to transfer money to fund the account.
2. Credit Unions
Credit unions are a great second option for those looking for community-based high-interest savings accounts. These institutions typically offer interest-earning products above the national average that are also insured with the National Credit Union Association (NCUA)—up to $250,000. However, membership to credit union accounts are often limited by additional requirements, like geographical area, employer, and organization affiliation.
3. Traditional Banks
High-yield savings accounts at traditional banks are few and far between, but they do exist. In most cases, you’ll find that you’ll need a higher minimum balance to earn a traditional bank’s highest APY. Plus, that rate may still be significantly lower than online banks. However, traditional banks usually offer the largest variety of banking products and the largest banking and ATM networks.
How to Open A High-yield Savings Account
There are many ways you can open a high-yield savings account. However, the easiest way to open a high-interest savings account is online. You can visit the provider’s website to view available products and open a high-interest account. You may be asked to set up an online ID and password for easy account access later.
Whether in a branch or online, you’ll need to provide some personal information, like your name, address, and Tax Identification Number (TIN). You’ll also need to provide some form of ID for verification. Traditional banks usually require two forms of ID with at least one being a government-issued ID. If you’re opening a second account with the same provider, you’ll likely be able to request a new account through your online banking portal.
Benefits and Disadvantages of High-yield Savings Accounts
Although high-yield savings accounts offer top-tier interest rates, they can be less accessible than standard savings accounts. However, if you’re in it for the long haul, the accessibility shouldn’t be too much of an issue.
Benefits of High-yield Savings
- Earn a high APY: High-yield savings accounts offer interest rates that can be as much as 25 times the national average.
- Meet savings goal faster: Higher APY means higher returns, which means you can meet your savings goals even faster.
- Ability to link to existing accounts: Most high-interest savings accounts allow you to easily link existing accounts from other financial institutions to your new account. This allows for easier transfers between accounts.
Disadvantages of High-yield Savings
- Limited transactions: Federal regulations limit the number of debits that can be made on the account each month, including ACH, debit card, and both online and phone transfers.
- Flexible rates: Although these accounts offer high rates, they are not permanent and can change at any time. If you need a locked-in rate, a CD is a better option.
- Possible minimum balance requirements: Some accounts require a minimum balance in order to earn a high APY, even if a minimum average balance isn’t required.
High-yield savings accounts function similarly to standard savings accounts, with interest rates being the main difference. High-yield savings accounts are a great way to save for future life events and a good way to meet your savings goals faster. Like with any account, you’ll need to review the bank terms, costs, fees, and restrictions before opening it.