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What Is a High-Yield Savings Account And How Does It Work?

Last updated 01/13/2023 by

Lacey Stark

Edited by

Fact checked by

A high-yield savings account is simply a regular savings account with a better than average interest rate. In general, online banks tend to offer much better interest rates on high-yield savings accounts than traditional banks and credit unions. This gives customers a better option to store their savings and earn more interest than with other savings vehicles.
Traditionally, it has made sense to keep your savings account in the same financial institution where you have your checking account. Transfers are easy and fast and it’s often just more convenient to keep your accessible cash all in one place. But the advent of online banks and high-yield savings accounts has changed the game.
Read on to learn more about high-yield savings accounts, the advantages and disadvantages, and what you should look for when deciding which online savings account to choose. First, let’s take a quick refresher on why it’s important to have a savings account in the first place.

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What is a high-yield savings account?

A high-yield savings account is like a traditional savings account on steroids. Both are deposit accounts where your savings are supplemented by interest payments. And either type of bank account may come with monthly fees, minimum balance requirements, or a minimum opening deposit.
It used to be that federal regulations (specifically Regulation D) limited the number of transactions you could make per month. In 2020, the Federal Reserve System decided to remove these federal limitations. However, your bank could still subject you to additional fees if you have more than six withdrawals in a monthly statement cycle if they choose to, so be sure to ask about that if it might be an issue for you.
The most significant difference between high-yield savings accounts and traditional savings accounts is the annual percentage yield (APY) you can expect to get. Although some brick-and-mortar banks and credit unions may offer some high-yield savings accounts, you’re pretty much guaranteed to get the best rates with online banks by a couple of points at least.
As of October 2022, the Federal Deposit Insurance Corporation (FDIC) reports the national average interest rate on savings accounts at 0.21% (though actual rates vary by bank). This number, it should be noted, is historically high due to recent raises in federal interest rates by The Federal Reserve. By comparison, high-yield savings accounts can go up as high as 3% or 4%, which is sometimes even more than you could get for a short-term CD.
To get a better idea of the interest rates you may qualify for, take a look at some of the high-yield savings accounts below.

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Considerations for high-yield savings accounts

The whole point of a high-yield savings account is to make sure you get the best APY. So as you sort through the various offers available for high-yield savings accounts, comparing interest rates is going to be a top priority. But it’s important to also research other savings account features to get the best overall deal.

Account fees

As you sort through different high-yield savings account options, take a look at the fee structures before you sign up.
Excess fees can take a bite out of your savings and negate any money you earn in interest. A monthly maintenance fee is common, or a charge for dropping below a minimum balance, but be on the lookout for any other possible fees.

Initial deposit money

Depending on how much you have for an initial deposit, you may need to be aware of any minimum deposit requirements. A lot of online savings accounts have no minimum deposit to open.
In some cases, however, you can’t get the highest advertised interest rate if you don’t have the minimum balance to open the account. The initial deposit can vary but could be as high as $1,000 to get the best savings rates.

Minimum balance requirements

Not all high-yield savings will require a minimum balance, but you’ll want to know that ahead of time so as to avoid monthly fees if you happen to drop below that minimum. If you think there’s any chance you can’t maintain the minimum balance required, search out high-yield savings accounts that don’t have that requirement.

Accessibility to funds

Because you’re most likely dealing with online banks if you have a high-yield savings account, your accessibility options are a bit more limited. You can easily transfer money to any linked account but it can take a few days to go through, meaning you won’t have instant access to your cash.
If that’s a concern, be sure to get a high-interest savings account that comes with a debit or ATM card, such as the accounts below.

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Compound interest

Annual percentage yields will let you know how much interest you can earn in a year, but you also might want to know how the interest is compounded. For example, some financial institutions will compound interest daily, weekly, or monthly. It’s encouraging for account holders to start watching the savings collect interest earnings right away.

Pros and cons of high-yield savings accounts

The higher interest rate that comes with a high-yield savings account is great, but it’s important to keep in mind that there are some drawbacks to doing all of your banking online or through a mobile app. It’s always a good idea to weigh the advantages and disadvantages before making any important financial decision.
Here is a list of the benefits and drawbacks to consider.
  • Higher interest rates are better than with traditional savings accounts.
  • It’s a safe place to put your emergency fund or other savings where you can’t lose money due to market fluctuations.
  • It’s ideal for short-term savings goals as opposed to retirement savings.
  • A high-yield account is a good place to put excess money from your checking while you decide how to invest it further.
  • Not suitable for long-term investments due to overall lower interest rates than other investments.
  • More limited options for making account deposits and withdrawals, since bank transfers can take a few days to clear.
  • May come with minimum opening deposit requirements.
  • Might charge monthly fees for not maintaining the minimum balance requirement or exceeding six transactions within one monthly statement cycle.

Alternatives to high-yield savings accounts

Money market accounts

A money market account can sometimes make sense as an alternative to a high-interest savings account, particularly if you want your cash to be accessible by multiple means and/or need to use it to pay bills. Money market accounts have the features of both a checking account — such as debit cards and checks — and a savings account, meaning you earn interest.
A money market account will also typically offer better interest rates than other savings accounts. This makes it a sensible option for those who want to earn interest on their savings while having more flexibility than some high-yield savings accounts.

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Certificates of deposit

Certificates of deposit (CDs) are a good choice for those who have a relatively short-term savings goal in mind (like a year or two) but want to keep their money out of temptation’s way. CDs are a type of deposit account where you get a better interest rate in exchange for agreeing to keep your money in the account for a specified period of time.
So if you’re saving for a down payment, for example, a CD is a great way to preserve capital and still earn a little interest to supplement the principal.

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Cash management accounts

A cash management account is a type of savings account usually held by a non-bank financial institution, such as a brokerage firm. Theoretically, the money is meant to be used for future investment purposes or to receive deposits from investments you’ve sold off, but it’s essentially a combination checking account, savings account, and investment account in one.
Plus, these accounts often offer very competitive interest rates over regular banks, making them another decent alternative to high-yield savings accounts that allow for added versatility.

Investment accounts

An investment account is a great way to save money for your retirement, but it really shouldn’t be considered a true alternative to a savings account. Savings accounts should help you plan for more short-term goals whereas investment accounts are better served for long-term investment strategies where you could lose money but gain it back over time.

Pro Tip

When deciding between high-interest bank accounts, be sure that the financial institution you choose is backed by FDIC insurance, meaning your deposit is safe up to $250,000. Most online banks (like brick-and-mortar banks and credit unions) are FDIC-insured, but make sure you confirm this before signing up.


Will I be taxed when I earn interest on a high-yield savings account?

Any interest you earn is considered income and you will be taxed at the same rate as you are for regular income. That means you need to claim it on your tax returns.
If you earn more than $1o in interest income the financial institution that holds your account will send you tax Form 1099-INT. Even if you collect less than $10, you’re still supposed to report it on your taxes.

How much money do you need to open a high-yield savings account?

While there are high-yield savings accounts that have no minimum, some online-only banks will require a minimum opening deposit to be eligible for the highest savings rates advertised.

How much does a high-yield savings account earn?

Due to varying interest rates between online banks and traditional banks and credit unions, it’s difficult to pinpoint exactly how much interest you can earn each year. But here’s an example:
If you had $5,000 in a traditional savings account earning a 1% APY, you would make only $50 per year in interest. By contrast, take that same amount of money and put it in a high-yield savings account at 3% and you’ll make $150 in interest earnings. That’s a fairly significant difference for earning completely passive income.

Key Takeaways

  • A high-yield savings account is much like other savings accounts but typically offers much more competitive interest rates.
  • While you might be able to find high-interest savings accounts at traditional financial institutions, you’ll usually get the best savings rates from online banks.
  • When researching high-yield savings accounts be sure to check for account charges such as minimum balance fees, monthly service fees, or other monthly maintenance fees.
  • Some drawbacks to high-yield savings accounts are limitations on how you can deposit and withdraw your money.
  • Alternatives to high-yield savings accounts include CDs, money market savings, and cash management accounts.

Why you need a savings account

Having a savings account, whether it’s a high-yield savings account, a money market account, or other type of savings bank account, is an important part of anyone’s financial portfolio. Most importantly, everyone should have at least a few months of expenses set aside as an emergency fund. You might even want to have multiple high-yield savings accounts to address different financial goals.
While there are plenty of good reasons to get a savings account, you’ll likely have to compare several accounts before finding the right one for you. Fortunately, our comparison tools allow you to sift through different savings accounts with all kinds of features, including those with fewer fees and others that come with debit cards.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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