What Is a Tiered-Rate Savings Account and How Do Tiered Interest Rates Work?

Article Summary:

A tiered savings account is a savings account that offers different interest rates that are dependent on the amount of money deposited in the account. Essentially, the bank pays a higher interest rate when the account balance reaches a certain threshold as an incentive for customers to leave larger deposits with the bank.

A tiered savings account offers an alternative way to safely invest compared to the traditional high-yield savings account. While many financial institutions may offer competitive rates on their high-interest savings accounts, those rates are normally fixed as long as the minimum daily balance and other requirements are maintained. A tiered-rate savings account, on the other hand, will have multiple possible interest rates that increase when the qualifying balance exceeds the specified amounts.

Let’s take a look at some examples of deposit accounts that earn interest and how tiered-rate accounts compare.

Deposit accounts that earn interest

Most checking accounts don’t come with an interest rate, so banks will offer alternative deposit accounts for savings that do earn interest. However, most major banks only offer a fraction of a percent as an annual interest rate. There are some major institutions offering more competitive rates on savings accounts, but they’re not as likely to have a local brick-and-mortar location that you can walk into.

Pro Tip

Current interest rates will usually be affected by the federal funds rate, which is the interest rate at which federal funds are traded between depository institutions overnight. The most competitive tiered rates offered by banks will usually be a percent or two less than the federal funds rate, so keeping an eye on this figure will help you determine the best interest rates you can currently find among savings accounts on the market.

Traditional savings accounts

A traditional savings account is the first bank account most people open. Arguably, their best feature is that they can instill healthy financial saving habits in an individual. That said, the interest rate offered on most traditional savings accounts will not even come close to keeping up with inflation.

If you need to build healthier saving habits, a traditional savings account may be a good place to start, but your money would probably be better off kept in a more competitive account with a higher rate of interest.

Pro Tip

Historically, there were federal regulations that limited transactions from savings accounts. Although these regulations have since been relaxed, many banks still charge excessive transaction fees. Make sure to familiarize yourself with your bank’s policies before withdrawing too frequently from your savings account.

High-yield savings accounts

Many non-traditional banking institutions now offer savings accounts with interest rates significantly higher than what most major banks offer on their traditional savings accounts. A high-interest savings account is arguably the least stressful way to earn interest. Still, these accounts might not be the right fit depending on your personal needs, especially if you don’t expect to be able to maintain the minimum daily balance that many such accounts require.

Money market accounts

A money market account is basically a hybrid account. It works like a savings account in that it comes with a competitive interest rate, but it also includes many of the benefits of a checking account, such as easier access to your money.

A money market account may be the best option if you want a higher interest rate but intend to make payments from the account on a semi-regular basis. A traditional checking account may better meet your needs if you don’t plan to maintain a higher balance all the time.

Pro Tip

Checking accounts, savings accounts, and money market accounts are typically insured by the Federal Deposit Insurance Corporation. Saving and investing money with any financial institution involves some level of risk, so if zero risk is your priority, make sure to keep your money in an FDIC-insured account.

Tiered-rate accounts

Some tiered-rate accounts function like traditional savings accounts, while others work more like money market accounts with variable interest rates. What sets a tiered-rate account apart is the fact that it will pay higher interest rates at higher balance levels. Essentially, the more money you leave in the account, the more interest the bank pays on that savings balance.

Note that the daily balance requirements will vary per account, but additional requirements don’t necessarily translate to a higher interest rate.

How to determine if a tiered-rate account is right for you

While a tiered-rate account may help you make the most of your money, it’s important to weigh the potential costs and fees that come with opening one. One account may come with a higher interest rate, but it may also come with a monthly maintenance fee. If you plan on regularly withdrawing cash from your tiered savings account, you’ll need to consider any minimum daily balance requirements on the account and the fees you might incur by accessing your funds too frequently.

Here are some of the factors to consider before opening a tiered-rate account:

Minimum daily balance requirement

The specific minimum daily balance requirements will vary depending on the financial institution, but whatever the limit may be, your account should not fall below this amount. Some tiered savings accounts will impose a penalty if your daily balance falls below the required minimum daily amount.

Maintenance fees

Some accounts will come with a monthly maintenance fee, which the bank charges to offset any losses they suffer for maintaining your account. In some cases, that maintenance fee could be higher than the interest you’d earn from your savings balance.

Transfer or transaction fees

Although federal regulations no longer limit transfers from savings accounts, many banks still charge a fee for outbound transfers beyond the traditional six-withdrawal limit. If you need regular access to your cash, a savings account of any kind may not be the best choice for you.

Money market accounts often permit a specific number of transactions, but they may also charge a fee if you exceed this transaction limit. The limits for withdrawals and transactions will vary from one bank to another.

Key Takeaways

  • A tiered savings account will pay varying rates of interest depending on the amount of savings in the account. As this amount grows past certain thresholds, higher rates of interest will be applied to the entire balance.
  • While tiered interest rates may be competitive, a tiered savings account may not be better than other deposit accounts, depending on your individual needs and goals.
  • While one account might offer the best rate upfront, it may not be the most profitable in the long run. Make sure to compare all interest rates and account fees to determine the best type of savings account for your needs.

Looking for a good savings account? Whether you want to start building better saving habits or you’re searching for the best interest rates, you can use SuperMoney’s comparison tools to find the best savings accounts for both your short-term and long-term financial goals!

View Article Sources
  1. Savings Deposits Frequently Asked Questions – Federal Reserve Board
  2. CFPB Consumer Laws and Regulations, Truth in Savings Act – Consumer Financial Protection Bureau
  3. Stashing cash finally pays off as savings interest rates rise from rock bottom in wake of Fed hikes – CNBC
  4. Open Market Operations – Federal Reserve Board
  5. FDIC: Deposit Insurance At A Glance – Federal Deposit Insurance Corporation