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

A high-yield savings account is a savings account where the bank pays you a higher percentage of interest on the money you deposit. The difference is real: a regular bank savings account might pay 0.01% per year, while a high-yield account at an online bank or credit union might pay 4% to 5% per year. On $10,000, that difference means you earn roughly $10 per year in a regular account versus $400 to $500 per year in a high-yield account.

High-yield accounts exist because online banks have lower overhead costs than brick-and-mortar branches. They pass some of those savings to you in the form of higher interest rates. The tradeoff is that you cannot walk into a physical location — you manage the account online or by phone. The money is still safe: deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account holder per bank, the same as any other bank account.

Key Takeaways

  • High-yield savings accounts pay interest rates between 4% and 5% annually, compared to 0.01% or less at traditional banks.
  • Online banks and credit unions offer high-yield accounts because they have lower operating costs than physical bank branches.
  • Your deposits are protected by FDIC insurance up to $250,000, the same protection as a regular savings account.
  • Interest rates on high-yield accounts change over time and vary between banks, so the rate you see today may not be the rate you earn next month.
  • You can transfer money in and out of a high-yield account, but some banks limit the number of withdrawals per month.

How interest rates work and why they change

The interest rate on a high-yield savings account is not locked in. Banks set their rates based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks raise the rates they pay on savings accounts. When the Fed lowers rates, banks lower what they pay you. This means the 5% you earn today could drop to 3% in six months if the Fed cuts rates.

Banks also compete with each other for deposits. If one online bank raises its rate to 5.2%, competitors often follow within days or weeks. You can shop around and move your money to whichever bank is paying the highest rate at any given moment. There is no penalty for switching banks, though the transfer itself takes a few business days.

Where to find high-yield savings accounts

Online banks are the most common source of high-yield accounts. Banks like Marcus, Ally, American Express Personal Savings, and Discover all offer rates in the 4% to 5% range. Credit unions also offer high-yield savings accounts, sometimes called share savings accounts, and rates vary by credit union. You can search for credit unions in your area through the CO-OP Network or Allpoint to see what rates they offer.

Traditional banks — the ones with physical branches — rarely offer high-yield rates. If you have an account at Chase, Bank of America, or Wells Fargo, their savings accounts typically pay 0.01% to 0.05%. If you want a high-yield rate, you will need to open an account at a different institution, though you can keep both accounts open at the same time.

How to move money into and out of a high-yield account

You can transfer money into a high-yield account from another bank account using an electronic transfer. This usually takes one to three business days. Some banks let you set up automatic transfers on a schedule — for example, moving $500 from your checking account to your high-yield savings every payday. You can also deposit money by mailing a check or, at some credit unions, depositing cash at an ATM.

Withdrawals work the same way: you can transfer money back to your checking account, and it arrives in one to three business days. Some banks limit how many withdrawals you can make per month, though this rule is less common than it used to be. Check the bank's terms before you open an account if frequent withdrawals matter to you.

The difference between high-yield savings and money market accounts

A money market account is similar to a high-yield savings account but usually comes with a debit card and checkbook. Money market accounts often pay slightly lower interest rates than high-yield savings accounts at the same bank. The tradeoff is convenience: you can write checks or swipe a card instead of waiting for a transfer to complete.

For most people, a high-yield savings account is the better choice if you are saving money you do not plan to spend often. Use it as a separate account from your checking account, which keeps the money out of reach of daily spending. If you need to access the money quickly and frequently, a money market account might make more sense, even if the interest rate is slightly lower.

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

Interest rates change constantly, so do not choose a bank based on today's rate alone. Look at the bank's history: has it kept rates competitive when other banks drop theirs, or does it lag behind? Read reviews from current customers about how easy the bank is to work with if you need to contact customer service.

Check whether the bank charges monthly fees. Most high-yield accounts have no monthly maintenance fee, but some charge a fee if your balance drops below a certain amount. Make sure your deposits are FDIC-insured by checking the bank's insurance status on the FDIC website. If you are depositing more than $250,000, you will need accounts at multiple banks to keep all your money insured.

How much money you can earn with a high-yield account

The amount you earn depends on how much you deposit and how long you leave it there. If you deposit $5,000 and earn 4.5% per year, you make roughly $225 in interest over twelve months. If you deposit $50,000, you earn roughly $2,250. The interest compounds, meaning you earn interest on your interest, though the effect is small in the first year.

High-yield accounts are best for money you plan to keep for at least a few months. If you need the money in a week or two, the interest you earn will be minimal. They are also useful for building an emergency fund, since the money stays separate from your checking account and earns more than it would in a regular savings account.

Frequently Asked Questions

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

No. Your principal — the money you deposit — is protected by FDIC insurance up to $250,000. The interest rate can drop, so you earn less than you did before, but you cannot lose the money itself. The only way to lose money is if you withdraw it and spend it.

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

Yes. Interest earned in a high-yield savings account is taxable income. The bank will send you a 1099-INT form 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 enough that it does not change your tax bracket significantly.

What happens if the bank goes out of business?

Your money is protected by FDIC insurance. If the bank fails, the FDIC pays you up to $250,000 of your deposits. This has happened only a handful of times in recent decades, and depositors have always been made whole. You can check a bank's safety rating on the FDIC website before you open an account.

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

Technically yes, but it is not ideal. High-yield accounts are designed for saving, not spending. Transfers take one to three business days, so you cannot access the money instantly like you can with a checking account. Most people keep a checking account for daily expenses and a high-yield savings account for money they want to set aside.

Is there a minimum deposit to open a high-yield account?

Most online banks have no minimum deposit requirement. You can open an account with $1 and start earning interest immediately. Some credit unions may have a small minimum, usually $25 or less. Check the specific bank or credit union's requirements before you open an account.