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. The difference is real: a regular savings account at a big bank might pay you 0.01% interest per year, while a high-yield account might pay 4% or 5% per year. That means if you have $10,000 in a high-yield account earning 5%, you earn about $500 in a year just from keeping your money there. In a regular account earning 0.01%, you earn about $1.

The reason the interest rate is higher is that high-yield accounts are usually offered by online banks or credit unions, not by the large brick-and-mortar banks you see on every street corner. Online banks have lower costs because they do not pay for physical branches, so they pass some of that savings to you in the form of higher interest rates. Your money is just as safe in a high-yield account as in any other bank account — it is still covered by FDIC insurance up to $250,000 per account holder per bank.

Key Takeaways

  • High-yield savings accounts pay interest rates that are typically 10 to 50 times higher than regular savings accounts at large banks.
  • The interest rate you earn changes over time and varies between banks, so comparing rates before you open an account matters.
  • 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 banks limit the number of free withdrawals per month.
  • High-yield accounts work best for money you are saving for a goal but do not need right away, like an emergency fund or a down payment.

How the interest rate works and why it changes

The interest rate on a high-yield savings account is not locked in. Banks set their own rates based on what the Federal Reserve does with something called the federal funds rate. When the Federal Reserve raises its rate, banks usually raise the interest they pay on savings accounts. When the Federal Reserve lowers its rate, banks usually lower what they pay you. This means the rate you see today might be different in three months or six months.

Banks also compete with each other for your money. If one online bank offers 4.5% and another offers 4.75%, some people will move their savings to the higher rate. This competition is one reason online banks pay more than big traditional banks — they need to attract customers who do not have a physical location to visit.

When you open a high-yield account, the bank will tell you the current rate, but you should understand that rate is not a promise forever. Read the account terms to see whether the rate is may provide for any period or whether it can change at any time. Most high-yield accounts have rates that can change whenever the bank decides.

Where to find high-yield savings accounts

High-yield savings accounts are offered by online banks, some credit unions, and occasionally by traditional banks trying to compete. Common online banks that offer high-yield accounts include Marcus by Goldman Sachs, Ally Bank, American Express Bank, and Discover Bank. Credit unions often offer high-yield accounts to their members, though the rates vary by credit union. Some traditional banks now offer high-yield savings accounts online, even if their in-person branches do not advertise them.

To find current rates, you can visit the websites of banks directly or use comparison sites that list rates from multiple banks. Because rates change frequently, a rate you see today might be different by the time you open an account, so check the current rate right before you sign up. Most banks let you open an account online in 10 to 15 minutes using your Social Security number, a government ID, and your current address.

What you need to know about deposits and withdrawals

You can deposit money into a high-yield savings account the same ways you deposit into any savings account: by transferring money from another bank account, by direct deposit from your paycheck, or sometimes by mailing a check. Withdrawals work the same way — you can transfer money out to another account you own, or request a check. Most high-yield accounts let you withdraw money whenever you want with no penalty.

Some banks have limits on how many withdrawals you can make per month before they charge a fee, though this is less common than it used to be. Check the account terms before you open to see whether there are withdrawal limits. If you think you will need to move money in and out frequently, make sure the bank you choose does not charge for that.

High-yield accounts versus money market accounts and certificates of deposit

A money market account is similar to a high-yield savings account — it pays interest and your money is FDIC insured — but it usually comes with a debit card or checkbook so you can spend directly from it. The interest rate is often similar to a high-yield savings account. Money market accounts work well if you want the higher interest rate but also want straightforward access to spend the money.

A certificate of deposit (CD) is different. With a CD, you agree to leave your money in the account for a set period — usually three months, six months, one year, or five years. In exchange, the bank pays you a higher interest rate than a high-yield savings account. The catch is that if you withdraw the money before the time period is up, you pay a penalty. CDs work best for money you know you will not need for a specific amount of time.

If you need your money to stay accessible, a high-yield savings account is the right choice. If you want to lock money away for a may provide higher rate, a CD makes sense. If you want both higher interest and the ability to spend directly, a money market account splits the difference.

Why a high-yield account makes sense for emergency savings

An emergency fund is money you keep set aside for unexpected costs — a car repair, a medical bill, a job loss. Financial advisors often suggest keeping three to six months of living expenses in an emergency fund. A high-yield savings account is one of the best places to keep this money because it earns interest while staying completely accessible. You can withdraw it the same day you need it, unlike a CD where you would pay a penalty.

Because the interest rate on a high-yield account is higher than a regular savings account, your emergency fund grows a little bit just from sitting there. If you have $5,000 in an emergency fund earning 4.5% per year, you earn about $225 in a year without doing anything. That money can cover part of a small emergency or add to your fund over time.

Things to watch out for when choosing a high-yield account

The interest rate is important, but it is not the only thing to consider. Check whether the bank charges a monthly maintenance fee — some do, some do not. Look at the minimum deposit required to open the account; some banks require $0, while others require $500 or $1,000. See whether the bank offers customer service by phone or email if you have questions, and whether you can manage the account easily online.

Also check the bank's reputation. Read reviews from other customers about whether deposits and withdrawals work smoothly, and whether the bank's website is straightforward to use. The FDIC insurance means your money is safe even if the bank fails, but you want to work with a bank that handles your account well while it is operating.

Finally, remember that the interest rate you see advertised is the current rate, not a may provide. Banks can lower rates at any time. If you open an account and the rate drops, you can move your money to a different bank that offers a higher rate — there is no penalty for closing a savings account.

Frequently Asked Questions

Is my money safe in a high-yield savings account?

Yes. High-yield savings accounts at FDIC-insured banks are covered up to $250,000 per account holder per bank, the same as any other bank account. If the bank fails, the FDIC guarantees your money. Online banks are just as safe as traditional banks for FDIC protection.

Can I use a high-yield account as my main checking account?

Most high-yield savings accounts do not come with a debit card or checkbook, so they are not designed for everyday spending. They work best as a separate account where you keep money you are saving. If you want higher interest and the ability to spend directly, a money market account might work better.

How often does the interest rate change?

Banks can change the interest rate on a high-yield savings account at any time, though they usually change it when the Federal Reserve changes its rate. Some banks change rates weekly or monthly. Check your account statements or log in online to see your current rate, and compare it to other banks if it drops significantly.

What is the difference between APY and interest rate?

APY stands for Annual Percentage Yield. It is the total amount of interest you earn in a year, including interest earned on your interest. The interest rate is the percentage the bank pays, and APY is what you actually earn. Banks are required to show you the APY so you can compare accounts fairly.

Do I have to pay taxes on the interest I earn?

Yes. The interest you earn on a high-yield savings account is taxable income. The bank will send you a form called a 1099-INT at the end of the year showing how much interest you earned, and you report that on your tax return. The amount is usually small, but it is still taxable.