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Key takeaways
- A high-yield savings account offers a much higher interest rate than a standard savings account.
- A higher interest rate lets you grow your savings faster.
- High-yield savings accounts are considered a safe, secure way to save for short-term goals.
A high-yield savings account, or HYSA, is a type of savings account that pays a significantly higher interest rate than a traditional savings account. A HYSA can be a powerful tool to make your money work harder and grow your savings more efficiently.
Before opening a new high-yield savings account, you need to understand how they work, the standard features of this type of account, and the pros and cons of opening a high-yield savings account.
What is a high-yield savings account?
Standard savings accounts and some checking accounts offer modest interest rates. A high-yield savings account has much higher rates so you can earn more on your savings.
The current national average interest rate for a standard savings account is 0.42%.1 With a HYSA, you can earn a much higher interest rate – up to 5% in some cases.2 Over time, your funds will earn more interest and your savings will grow faster.
How does a high-yield savings account work?
High-yield savings accounts are typically offered by financial institutions or financial tech companies that offer online banking services. These institutions have lower overhead costs and can offer higher interest rates on their savings accounts. Here’s how they work.
- HYSAs have higher interest rates than traditional savings accounts
- They also have compound interest to help you grow your savings faster
- Many have FDIC insurance that protects your money in case of bank failure
- Funds are easily accessible via online transfers or ATM withdrawals
- Interest earned on a HYSA is subject to federal income taxes
The annual percentage yield (APY) on a savings account represents the total interest earned over a year, expressed as a percentage of your initial balance. With compound interest, you earn interest not only on your initial deposit but also on the interest that accumulates over time. This results in a higher return on your money than simple interest, where you only earn interest on your initial deposit.
Interest may compound daily, monthly, or annually. The faster it compounds, the more your savings will grow. At the end of each compounding period, the interest earned is added to your balance, increasing the amount on which future interest calculations are based.
Here’s an example of how a HYSA with a 4% APY that compounds annually would grow over a five-year period.
| Time | Account Balance |
|---|---|
| Initial deposit | $5,000 |
| After one year | $5,200 |
| After two years | $5,408 |
| After three years | $5,624.32 |
| After four years | $5,849.29 |
| After five years | $6,083.26 |
This example doesn’t include any additional deposits beyond the initial one. Learn how much you should save each month to help your money grow even faster.
Look for accounts that consistently offer competitive rates. Note that some banks may offer promotional rates that revert to higher rates after an introductory period.
Common features of a high-yield savings account
Minimum initial deposit
Some banks require a minimum initial deposit to open a high-yield savings account, while others do not – and the required deposit could be more than you initially have.
Choose an account that fits your budget and doesn’t put pressure on your finances. If you’re just building your savings, look for accounts with a lower initial deposit requirement.
Minimum balance
In addition to the initial deposit, some high-yield savings accounts have minimum balance requirements to avoid fees or to get a higher APY. Be aware of these requirements, and choose an account that will allow you to easily maintain the minimum balance.
Fees
Some banks charge a monthly maintenance fee for their high-yield savings accounts. However, the fee is often waivable if you maintain a certain balance or deposit a minimum amount per month.
Other common bank fees include excessive transaction and wire transfer fees. Look for an account with minimal fees and review the requirements for avoiding them.
Withdrawal and transfer limits
High-yield savings accounts often limit the number of withdrawals and transfers you can make each month to encourage saving. For example, some institutions may have a monthly limit of six withdrawals and impose a penalty for any additional withdrawals.
You may also be limited to the amount of money you can withdraw or transfer at a time. Check the terms of the HYSA you’re considering so you know what to expect.
Deposit insurance
Check that your HYSA includes FDIC insurance (for banks) or NCUA insurance (for credit unions). These entities federally insure deposit accounts for at least $250,000, so your money is safe even if the bank fails.3,4
How to open a high-yield savings account
Once you’ve chosen a bank, the process of opening a high-yield savings account is straightforward. Gather the following documentation:
- Social Security number.
- Photo identification (like your driver’s license or passport).
- Personal information (like your address, phone number, and email).
Next, fill out and submit the application form. If the bank requires a minimum deposit to open a HYSA, arrange a transfer from your checking account or another funding source to complete the account opening process.
Chime tip: Consider setting up automatic deposits to your high-yield savings account to help your savings grow on autopilot.
Pros and cons of high-yield savings accounts
High-yield savings accounts are one of the best ways to save money fast – but they’re not without their downsides. Here’s a quick look at the biggest pros and cons of a HYSA.
| Pros | Cons |
|---|---|
| High interest rates | May have withdrawal limits |
| Accelerated savings growth | May have more requirements to open |
| Safe and secure | Not the first option for long-term goals |
| Low-risk investment opportunity |
High-yield savings account pros
The higher APY of a high-yield savings account helps your savings grow much faster than they would in a standard savings account. Most institutions offer deposit insurance through the FDIC or NCUA, so your money is safe and secure.
Additionally, a HYSA is considered a lower-risk way to grow your money than investing in stocks and bonds, making it a better option for an emergency fund or a down payment for a house or car.
High-yield savings account cons
High-yield savings accounts aren’t ideal for long-term wealth building due to the relatively lower interest rates compared to long-term investments. They may also have more requirements to open than a regular savings account.
Many have limits on withdrawals, so your money isn’t as accessible as it could be.
Learn about the differences between saving and investing to determine the best place to put your money.
Grow your savings faster with a high-yield savings account
A high-yield savings account has many financial benefits and few drawbacks. It’s the ideal account for your emergency savings or to save money for a down payment on a house or car.
If your current savings account isn’t earning much money, check out the current rates for some high-yield savings accounts. Learn how to grow your money faster with a Chime high-yield savings account.
Frequently asked questions
Do I pay taxes on a high-yield savings account?
The interest earned on a high-yield savings account is considered taxable income and is taxed at your regular rate. At the end of the year, your bank will send you a Form 1099-INT, which shows the amount of interest you earned during the year. You’ll report this income to the IRS when you file your taxes.
Are high-yield savings accounts safe?
High-yield savings accounts are generally considered safe. Most reputable financial institutions offering these accounts are insured by the FDIC or NCUA, protecting deposits up to the maximum allowable limit. This insurance safeguards your funds in the event of a bank failure or financial downturn.
Do high-yield savings account rates change?
High-yield savings account rates are variable and can change at any time. If the rate increases, so will your earnings. If it decreases, you’ll earn less on your savings. Use a savings goal calculator to determine your savings based on current interest rates.
Can you withdraw money from a high-yield savings account?
Yes, you can withdraw money from a high-yield savings account. However, these accounts often limit the number of withdrawals allowed per month to encourage saving. Exceeding the monthly withdrawal limit may result in fees or other penalties.
Can you lose money in a high-yield savings account?
High-yield savings accounts are typically low-risk, meaning your initial deposit is generally safe and secure. However, while your savings will grow over time with interest, the returns may not always keep pace with inflation. The purchasing power of your savings may be affected, potentially resulting in a loss of real value.