A high-yield savings account pays you more interest than a regular savings account

A high-yield savings account is a savings account where the bank pays you a higher percentage of interest on the money you keep there. When you put $1,000 in a regular savings account at many big banks, you might earn almost nothing — sometimes less than $1 per year. In a high-yield savings account, that same $1,000 might earn $40 to $50 per year, depending on the current interest rate. The difference comes down to how the bank operates and what it does with your money.

Most high-yield savings accounts are offered by online banks — banks that have no physical branches and run their business entirely through websites and apps. Because they have lower costs than traditional banks with buildings and staff in every neighborhood, they can afford to pay you more. Your money is just as safe in an online bank as in a brick-and-mortar bank, because deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account.

Key Takeaways

  • High-yield savings accounts typically pay between 4% and 5% annual interest, though this rate changes based on what the Federal Reserve does with interest rates.
  • Online banks offer higher rates than traditional banks because they have fewer physical locations and lower operating costs.
  • Your money is protected by FDIC insurance up to $250,000, the same as any other bank account.
  • You can withdraw your money whenever you need it, though some accounts limit how many withdrawals you can make per month without a fee.
  • The interest you earn is taxable income, so you will receive a tax form at the end of the year.

How the interest rate works and why it changes

Banks set their interest rates based partly on what the Federal Reserve does. The Federal Reserve is the central bank of the United States, and it sets a target interest rate that influences what all banks pay and charge. When the Federal Reserve raises its rate, banks tend to raise the rates they pay on savings accounts. When the Federal Reserve lowers its rate, banks lower what they pay you.

Right now, high-yield savings accounts pay somewhere between 4% and 5% annually, but this number is not fixed. It changes as the Federal Reserve makes decisions, usually a few times per year. This means the rate you see today might be different in three months. Some banks lower their rates faster than others when the Federal Reserve cuts rates, so it is worth checking what your bank is paying every few months.

The percentage rate is called the Annual Percentage Yield (APY). This is the total amount you will earn in one year if you leave your money untouched. If you have $10,000 in an account with a 4.5% APY, you will earn about $450 in one year (though the bank usually adds the interest monthly, so you earn a small amount each month).

Where to find high-yield savings accounts

Most online banks offer high-yield savings accounts. Some of the larger ones include Marcus by Goldman Sachs, Ally Bank, American Express Personal Savings, and Capital One 360. Credit unions also sometimes offer high-yield savings accounts, and some traditional banks have started offering them too, though usually at lower rates than online banks.

You can open an account with any of these banks through their website. You will need to provide your Social Security number, proof of identity (usually a driver's license or passport), and proof of address (usually a recent utility bill or bank statement). The process typically takes 10 to 15 minutes, and you can start depositing money the same day.

Before you open an account, compare the APY across a few banks. The difference between 4.25% and 4.75% might not sound like much, but on $10,000 it means $50 per year. On $50,000 it means $250 per year. Websites like Bankrate and DepositAccounts list current rates across many banks and update them regularly.

How withdrawals and limits work

You can withdraw money from a high-yield savings account whenever you need it. Unlike a certificate of deposit (CD), which locks your money away for a set time, a savings account is always accessible. You can move money to your checking account, transfer it to another bank, or withdraw it as cash.

Some high-yield savings accounts limit how many withdrawals you can make per month without paying a fee. Federal rules used to require this, but those rules changed in 2020, and now most banks allow unlimited withdrawals. However, a few banks still charge a fee if you withdraw more than six times per month, so check the account terms before you open one.

The tax side of high-yield savings

The interest you earn on a high-yield savings account is taxable income. This means you have to report it on your tax return, and you may owe income tax on it. At the end of each year, the bank will send you a form called a 1099-INT, which shows how much interest you earned. You will use this form when you file your taxes.

If you earned less than $10 in interest during the year, the bank might not send you a 1099-INT, but you still have to report the income. The amount of tax you owe depends on your overall income and tax bracket. If you are in a lower tax bracket, you might owe very little. If you are in a higher bracket, you will owe more. A tax professional or tax software can help you figure out what you owe.

High-yield savings versus other places to keep money

A high-yield savings account is different from a regular savings account, a money market account, and a certificate of deposit. A regular savings account at a big bank might pay 0.01% APY, which means you earn almost nothing. A money market account sometimes pays slightly more than a regular savings account but usually less than a high-yield savings account, and it may require a larger opening deposit. A certificate of deposit (CD) locks your money away for a set period — three months, six months, one year, or longer — but often pays a higher rate than a high-yield savings account.

If you need access to your money at any time, a high-yield savings account is better than a CD because there is no penalty for withdrawing early. If you want the highest possible rate and do not mind locking your money away, a CD might be worth considering. If you want a place to keep emergency money that you might need quickly, a high-yield savings account is usually the best choice because it pays much more than a regular savings account and lets you withdraw whenever you need to.

Frequently Asked Questions

Can I lose money in a high-yield savings account?

No. Your money is insured by the FDIC up to $250,000, so even if the bank fails, you will not lose your deposits. The interest rate can go down, which means you will earn less in the future, but the money you already have will not shrink.

How often does the interest get added to my account?

Most banks add interest monthly, though some add it daily or quarterly. The more often interest is added, the slightly more you earn because you earn interest on the interest itself. Check your bank's website to see how often they add interest.

Is there a minimum amount I have to keep in the account?

Many high-yield savings accounts have no minimum balance requirement, but some require $500 or $1,000 to open. A few require you to maintain a minimum balance to keep earning the advertised rate. Read the account terms carefully before opening.

What happens if interest rates drop?

When the Federal Reserve lowers rates, banks lower the rates they pay on savings accounts. Your existing money stays in the account and does not disappear, but you will earn less interest going forward. This is why some people move money between banks to find the highest current rate.

Can I have more than one high-yield savings account?

Yes, you can open accounts at multiple banks. However, FDIC insurance covers up to $250,000 per bank, not per account. If you have $300,000 in savings, you could put $250,000 in one bank and $50,000 in another to keep all your money insured.