High-yield savings account

The name describes the rate and nothing else. A high-yield savings account holds the same kind of deposit as the savings account at a branch, insured to the same limit and reached by the same transfer to and from checking; the bank, usually one with no branches to run, competes on the rate rather than the location. The balance cannot fall, and the rate can change at any time, which makes the account the right home for money with a job in the next few years and the wrong one for money with decades to grow. At the 4.00% APY in the example below, $10,000 earns $400 in a year against $10 in a branch account paying 0.10%.

In a sentence

• "The emergency fund is in a high-yield savings account. At the 4.00% APY it paid this year, $10,000 earned $400 instead of the $10 the old account would have paid."
• "A high-yield savings account is not an investment. Its balance never falls, and it never grows the way a stock fund can."
• "Opening the high-yield savings account took ten minutes online, and a transfer from checking lands in a day or two."

How it works

1. Open the account online and link your checking account. Many have no minimum balance and no monthly fee.
2. Move money in by transfer from the linked account, on a schedule or by hand.
3. Interest is computed daily and credited monthly, at a variable rate the bank can change at any time. The rate is quoted as an APY, which includes the compounding, so a balance held for a year with nothing added earns the balance times the APY.
4. Move money out by transfer to checking, which usually takes one to three business days. Some banks still limit withdrawals a month, and checks and debit cards are uncommon.
5. The balance is insured up to $250,000 per depositor, per institution, per ownership category, by the FDIC at a bank and by the NCUA at a credit union.

Interest for a year = balance × APY

The rate moves with the Federal Reserve's short-term rate, so a rate that led the market one year can be ordinary two years later; the account's job at either level is to hold cash at face value while it earns whatever the current rate is.

An example

The example assumes a branch savings account paying 0.10% APY and a high-yield savings account paying 4.00% APY, each balance held for a year with nothing added; both rates are the example's inputs, not a claim about today's market.

The $10,000 emergency fund earns $400 in a year at the higher rate, about $33 a month, for the same insurance and the same transfer. Left for five years with nothing added, the same $10,000 grows to $12,167 at 4.00% and to $10,050 at 0.10%. Neither rate will hold for five years; the point is the gap between the two accounts, not the level of either.

Why it matters

The account decides where cash with a job goes. The emergency fund, a sinking fund, next year's tuition and a down payment due inside a few years all need a balance that cannot fall on the day it is needed, and the choice is between a high-yield account that pays something and a branch account that pays almost nothing for the same safety; on $10,000 the difference is a few hundred dollars a year for ten minutes of work. Money with decades to grow, retirement savings above all, is unlikely to outrun inflation by much in a savings account, because the rate is set to hold value rather than build it. The mistake runs both ways: five figures left at a branch rate for years, or a down payment put in the market because the savings rate looked small.

High-yield savings account versus savings account

A high-yield savings account and a regular savings account are the same kind of account; the difference is the rate and how you reach the bank. Both hold a deposit insured to the same limit, both pay a variable rate quoted as an APY, and both are reached by transfer rather than by card or check. The branch account comes with a teller and a same-day move into checking at the same bank; the high-yield account comes with a rate that can be many times higher and a transfer that takes a day or two. For money that is not spent from, the rate wins. See Savings account.

Common questions

Is a high-yield savings account safe? Yes, to the insured limit. At an FDIC-insured bank or an NCUA-insured credit union, deposits are covered up to $250,000 per depositor, per institution, per ownership category, whatever happens to the bank.

What is a good high-yield savings account rate? Whatever the leading online banks are paying this month. The rate follows the Federal Reserve's short-term rate, so a figure that was strong two years ago can be ordinary now; compare a few banks on the same day, and read the conditions on any rate far above the rest.

Is a high-yield savings account the same as a money market account? Nearly. Both are insured deposits paying a variable rate quoted as an APY. A money market account usually adds checks or a debit card and often a minimum balance; a high-yield savings account usually has neither. See Money market account.

Can I lose money in a high-yield savings account? Not in dollars. The balance only ever rises, by the interest credited, and the insurance covers it if the bank fails. What can fall is the rate, which the bank may change at any time, and the purchasing power of the balance if inflation runs above the rate.

Is the interest taxed? Yes, as ordinary income in the year it is credited, whether or not you withdraw it. The bank reports it to you and to the IRS on a Form 1099-INT, and the tax is paid through your return rather than taken from the account.

Go deeper

• How to build an emergency fund inside a monthly budget puts the fund in a separate savings account and sizes the first target at one month of essentials.
• The Savings goal calculator works out what to set aside each month to reach a goal by a date, with the account's interest counted along the way.
• The Compound interest calculator shows how a starting balance and a monthly contribution grow at a given return over the years.

Where it shows up in Zypper

Zypper connects a high-yield savings account the way it connects any savings account. Checking and savings accounts, including money market accounts and CDs, connect through your bank and sync automatically every day, and the savings balance counts toward net worth, charted over time. When money moves between your own accounts, both sides show up as transactions, and Zypper links them as one transfer so the payday move into savings never reads as spending or distorts your cash flow. See Supported account types and Splitting and linking transactions for the details, or get started with Zypper to see the balance beside everything else.