High-Yield Savings Account
A high-yield savings account is similar to a traditional savings account, except it offers significantly higher interest rates to grow your investments as you near retirement. Typically offered by online banks, high-yield savings accounts provide high liquidity, compounded interest and are typically FDIC insured. Learn more about the pros and cons of high-yield savings accounts.
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Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.Read More
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Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.Read More
- Published: March 22, 2023
- Updated: April 28, 2023
- 6 min read time
- This page features 8 Cited Research Articles
- Edited By
- A high-yield savings account may offer anywhere from 3% to 5% APY, which is much higher compared to a traditional savings account.
- High-yield savings accounts are best fit for older adults looking for a short-term investment with high returns.
- There are potential risks with a high-yield savings account, such as variable rates and possible penalties.
- You’re likely to get a higher rate if you open your high-yield savings account at an online bank instead of a brick-and-mortar bank.
What Is a High-Yield Savings Account?
A high-yield savings account is a savings vehicle with high rates to quickly grow your retirement savings. Your rate of return for a high-yield savings account is measured in annual percentage yield (APY), which is how much interest you’ll earn within one year. Since high-yield savings accounts earn compound interest, the interest you earn over time will also accumulate interest.
While the national average return on traditional savings account is around 0.35%, you can earn over 5% with a high-yield savings account.
High-yield savings accounts are considered liquid assets compared to other investment options, like CDs, which require you to leave your money untouched for months or years to come. However, this doesn’t mean there is limitless access to your high-yield savings account. With some issuers, there may be limits on how often you can access your funds.
- High rates, generally between 3% to 5% APY
- Compounded interest (daily, monthly or quarterly)
- Variable rates
- Fairly liquid (though there may be limits on how often you can access your funds)
- FDIC insured at banks or NCUA insured at credit unions
Generally, high-yield savings accounts are considered relatively safe investment vehicles for your retirement plan. You should consider your specific needs to ensure it’s a right fit for your financial goals.
Although interest rates have been rising for some time, many savings accounts haven’t kept pace. You might not be earning as much for your cash if you’re not using a high-yield savings account. High-yield savings accounts are a good place to park your cash for temporary needs, but aren't a substitute for long-term, diversified investing. Over time, the rate of inflation can still be higher than a high-yield savings account rate of interest.
Who Should Consider a High-Yield Savings Account?
If you’re looking for a secure, short-term investment to quickly maximize your savings, a high-yield savings account could fit the bill.
Due to its variable interest rates, high-yield savings accounts present risk if you’re considering one for a long-term investment. Your APY could fluctuate and decrease from what you were originally issued. So, it’s safer to consider high-yield savings accounts for a short-term investment since there’s no guarantee that you’ll maintain a high rate forever.
Factors To Consider When Choosing a High-Yield Savings Account
When choosing a high-yield savings account, consider its APY, deposit requirements, potential fees, accessibility and insurance coverage before opening an account. You should always shop around and compare these factors to avoid unnecessary risk before adding a high-yield savings account to your retirement portfolio.
Generally, a high-yield savings account with above 3% APY, no fees or minimum balance requirements from an FDIC-insured bank would be considered a safe investment. It’s important to understand how each feature works to determine which factors matter the most to you.
Interest Rate & APY
Expect a range of 3% to 5% APY with a high-yield savings account. If your high-yield savings account is offering under 2%, it isn’t really considered high-yield and you should look into different issuers with better rates.
To highlight your potential gains, let’s compare a high-yield savings account’s earnings to a traditional savings account. In this example, you’re looking to invest $10,000 for one year.
|Account Type||Traditional Savings Account||High-Yield Savings Account|
|Amount of Interest Earned After One Year||$21||$385|
For this example, we’re assuming the APY rate stays the same. However, know that your rate is likely to fluctuate since high-yield savings accounts have variable interest rates.
While your interest rate and APY are related to one another, they aren’t interchangeable terms. Your APY is the amount of interest you will earn within your high-yield savings account in a year.
Your APY will be compounded daily, monthly or quarterly with your high-yield savings account, but most bank accounts compound interest monthly.
Minimum Deposit & Balance Requirements
Some, but not all, high-yield savings accounts will require a minimum deposit or balance. If your account dips below the minimum, you could face a potential charge or fee.
According to the Consumer Financial Protection Bureau, high-yield savings accounts are likely to require a higher minimum balance compared to traditional savings accounts.
However, this isn’t to say all banks require a minimum deposit or balance. For example, Discover, Ally Bank and Citi Bank don’t require a minimum deposit for their high-yield savings account.
Accessibility & Convenience
High-yield savings accounts are easy to open and fairly liquid compared to other investment vehicles. But some issuers have restrictions on how many withdrawals you can make. For example, with Discover and Ally Bank, you can only make six withdrawals per statement cycle.
Almost all high-yield savings accounts are FDIC insured for up to $250,000. This means if the issuing bank goes under, the federal government protects your assets up to $250,000. To confirm if your high-yield savings account is FDIC insured, make sure the issuing bank is FDIC insured. Typically, it will be boldly advertised on the bank’s website.
If you’re opening a high-yield savings account at a credit union, it will be insured by the NCUA instead, for the same amount. The same rule applies — confirm your credit union is NCUA insured before opening an account to lower any potential risks.
How To Open a High-Yield Savings Account
According to American Express, it typically takes under 10 minutes to open a high-yield savings account online. You will need to register for an account with the bank of your choice and fill out an application online.
On your application, you’ll need to input personal information, like your Social Security number and date of birth. You should also determine your initial deposit amount before starting your application.
After you receive confirmation that your account has been created, you will need to add funds to your high-yield savings account. You can do this by linking your current bank or by mailing a check. Linking your external account can take several days, according to American Express.
Once your high-yield savings account is opened, you can sit back and watch your retirement funds begin to grow. You can also add to your initial deposit to increase your gains.
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8 Cited Research Articles
- CNBC. (2023, April 21). Earn More Than 5% Interest on Your Money: The Best High-Yield Savings Accounts of April 2023. Retrieved from https://www.cnbc.com/select/best-high-yield-savings-accounts/
- Gravier, E. (2023, March 27). High-Yield Savings Account Rates Are Dropping, but They Can Still Earn You Over 12X More Money Than the National Average. Retrieved from https://www.cnbc.com/select/traditional-savings-accounts-vs-high-yield-savings-accounts/
- Federal Deposit Insurance Corporation. (2023, March 14). Are My Deposit Accounts Insured by the FDIC? Retrieved from https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/
- Bendig, E. (2023, February 27). What Is a High-Yield Savings Account? Retrieved from https://www.kiplinger.com/personal-finance/banking/what-is-a-high-yield-savings-account
- Federal Deposit Insurance Corporation. (2023, February 21). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/2023-02-21.html
- Discover Bank. (2023). Online Savings Account FAQ. Retrieved from https://www.discover.com/online-banking/faq/savings-account/
- Consumer Financial Protection Bureau. (2022). Options for Storing Your Savings. Retrieved from https://files.consumerfinance.gov/f/documents/cfpb_building_block_activities_options-for-storing-savings_handout.pdf
- American Express. (n.d.). Online Savings Account. Retrieved from https://www.americanexpress.com/en-us/banking/online-savings/account/
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