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My high-yield savings account (HYSA) has been a key part of growing my money. It’s helped me earn significantly more interest on my deposits compared to traditional savings accounts. And that remains true today, even after the Federal Reserve cut its federal funds rate by a half point in September 2024.
The federal funds rate influences most interest rates in the U.S. economy, including the annual percentage yield (APY) that I receive from my high-yield savings account.
And while my high-yield account lowered its APY this month (and I expect that APY to drop more), it still earns me hundreds of dollars more each year compared to Chase, Wells Fargo, Bank of America and other traditional banks. Let me show you how.
Are high-yield savings accounts worth it? My real-life HYSA experience
I was skeptical when I first heard about high-yield savings accounts. My traditional savings account paid 0.01% APY, so how could other savings accounts pay 4.00% APY — 400 times the interest I was getting?
As many of us have learned in recent years, HYSAs aren’t magic, just a smarter way to save and grow your money. HYSAs typically come from online banks and credit unions that don’t have the high operational expenses big banks deal with. So they pass along these overhead savings in the form of higher APYs.
That’s why HYSAs are still worth it, even if the Federal Reserve cut its federal fund rate several more times this year and the next. The Fed’s half-point cut put downward pressure on APYs, but HYSAs literally still pay hundreds of times the interest you get with many traditional accounts. Future rate cuts may reduce the amount of interest you earn, but you’ll typically still earn more interest from A HYSA than a traditional savings account.
Earn up to 4.30% APY with direct deposits
$0 monthly maintenance fee
Dig deeper: Grow your money with one of these 7 best high-yield savings account
How much more can I earn with an HYSA?
You may have already noticed the impact of the Fed’s rate cut on savings yields. For example, My SoFi HYSA moved its APY from 4.50% to 4.30% in October 2024 and Wealthfront Cash Account changed its APY from 5.00% to 4.50% in September 2024.
But at these rates and even lower, I still earn considerably more money on my savings compared to a traditional account:
Let’s assume a 4.30% APY to keep things simple. Here’s how much I’d earn on a $10,000 balance after years one, three and five:
This means I’d earn $450 for each $10,000 in this HYSA compared to a single $1 in a 0.01% APY traditional account. Over a five-year period, I’d end up racking up $2,462 in my high-yield account compared to $5 in the traditional account.
However, I know that my APY will likely drop further from 4.50%. Most economists today expect the Federal Reserve to continue cutting rates in 2024 and 2025. With that in mind, here’s how much I’d make should my APY drop to 3.00%:
Dig deeper: High-yield savings vs. traditional savings
Real-life interest earnings from high-yield savings
In real life, I began receiving monthly interest payments of as much as $42.06 after I transferred my money to an HYSA. My bank determined the amount of each payment based on my balance every day of each month. That’s why banks typically describe APY earnings as daily compounding.
On top of these earnings, my high-yield savings account came with no monthly maintenance fee. This was the cherry on top, since my traditional savings account charged me $6 every month that I didn’t maintain my balance above $500.
How do high-yield savings accounts work?
Banks use your deposits, including those in high-yield savings accounts, to fund the loans they give out. Your bank earns interest from these loans and shares a portion of it with you.
Let’s say you deposit $10,000 into a savings account, whether a traditional or high-yield account. Here are three steps that happen behind the scenes:
No loan is free. Banks charge one another interest for these short-term loans. The interest rate they charge is influenced by the Federal Reserve, the U.S. central bank. When the Fed raises rates, it increases the interest a bank earns when it lends out money to another bank.
Banks use their earnings on operating costs. Banks typically use the money they earn from their loans, fees, foreign exchange and more to cover employee salaries, brick-and-mortar branches and other operating costs.
Banks share more with you. Most banks pass along a portion of their profits to you. Yet while many traditional banks provide APYs of 0.01% on your savings, online-only banks can afford to pay out much higher yields on their digital savings accounts.
Are high-yield savings accounts safe?
Most high-yield savings accounts are protected by the same insurance you get with traditional savings accounts.
This insurance from the Federal Deposit Insurance Corporation (FDIC) covers your money against bank failure for up to $250,000 per depositor and ownership category. This means that you get up to $250,000 coverage for your personal account, a separate coverage up to $250,000 for your joint account and so on.
If you open your HYSA with a credit union instead, you’ll typically receive insurance from the National Credit Union Administration (NCUA) that protects up to $250,000 per depositor and ownership category.
That said, you want to take care not to keep more than $250,000 with any one bank to avoid exposing your money to loss. The simplest way to protect your excess money is by moving it to a new account at a different FDIC-insured bank (though there are several ways to extend FDIC insurance coverage to protect excess deposits, depending on your circumstances.)
Dig deeper: Can you lose money in a high-yield savings account? It’s unlikely — but here’s what to watch for
Do you pay taxes on a high-yield savings account?
The IRS considers the interest you earn on HYSAs and other deposit accounts taxable income, which means you must report it on your tax return.
So how do you know how much interest you earned? At the start of every tax season, your bank sends a form 1099-INT, which details the interest you earned in the previous year. The IRS taxes this interest based on my tax bracket. For example, if I’m in the 22% tax bracket, I would pay 22% of my interest income.
Your total taxable income determines your tax bracket. Here’s a simple way to find out the tax bracket you’re in:
If you use software to file your taxes, it’d usually prompt you to upload your 1099-INT form or enter information from specific fields on it. On the other hand, if you hand your information to a tax preparer, they should be able to add your interest income to your tax filing.
How to open a high-yield savings account
Opening my first high-yield savings account was as simple or even simpler than setting up a traditional bank account. That’s because most HYSAs offer online applications without requiring a branch visit.
Here are the steps you’d typically follow:
Apply online. Once you have an HYSA in mind, start your account application with such personal information as your Social Security number and driver’s license or other government-issued ID.
Verify your identity. Some banks may require you to enter a code sent to your mobile number or to upload an image of your ID. This is to confirm you are who you say you are.
Fund your account. Choose how to make your initial deposit. The most common option is a transfer from another bank account, though some HYSAs allow for deposits by debit or credit card.
Set up online access. Don’t forget to set up online access through your browser or the bank’s app on your phone after you receive an account approval. This will make it easy to transfer money in and out of your account.
Dig deeper: How to find and open a high-yield savings account
Benefits of high-yield savings accounts
Higher yields on your savings. HYSAs pay out higher rates on your money that are typically well above the national average. This increases your monthly interest payments. It’s like your money works harder, so you don’t have to.
Minimal fees. Many banks that offer HYSAs charge no monthly fees. Some even reimburse you for ATM fees and minimize other fees, like those you might pay for overdrafts. This is, in part, thanks to lower operating costs than traditional banks.
FDIC insurance. Most HYSAs are protected by FDIC insurance for up to $250,000 per depositor. Some even go well beyond this limit — for example, SoFi Savings offers up to $2 million in FDIC insurance.
Dig deeper: How to make sure your bank is FDIC-insured — and what to watch for with nonbanks
Drawbacks of high-yield savings accounts
Variable APYs. The APY you earn today on your HYSA can go up or down based on market conditions. For example, a rate cut from the Federal Reserve may reduce the rate you earn, while a rate hike – although unlikely – may increase it.
Limited branch access. Many HYSAs operate completely online, without the in-person branch support you might be used to. However, most digital banks offer reliable phone and chat support. Some even offer debit cards and ATM fee reimbursements to compensate for the lack of a brick-and-mortar experience.
FAQs: HYSAs, your money and growing your wealth
Still not convinced a high-yield account is best for your savings? Learn more about managing your money.
How often can I withdraw money from a high-yield savings account?
While many banks used to limit withdrawals from high-yield and other savings accounts to six a month, the Federal Reserve suspected that limitation during the pandemic, resulting in more flexible access to your money without penalties or fees. That said, I’ve come across charge fees for excessive withdrawals — for instance, the Ally Savings Account limits withdrawals and transfers to 10 a month. Review your account’s fine print for the allowed number of withdrawals and any penalties for exceeding the limit.
How much should I keep in a high-yield savings account?
Financial experts generally recommend that you keep an emergency fund that can cover three to six months’ worth of necessary living expenses in a readily accessible account, such as a high-yield savings account. However, you don’t want to keep so much in your account that you’re sacrificing higher returns elsewhere. Learn more about how to find that savings sweet spot in our guide to finding the best balance for your HYSA.
Can I have more than one savings account?
Yes, you can have more than one savings account. While some banks may limit you to one account, you can always open new accounts with other banks. This can help you spread your money, benefit from different perks each bank offers and even access more FDIC coverage. Stay on top of banking benefits, products and news to find what works best for you.
What are the benefits of a joint bank account?
Joint bank accounts can be a powerful tool for anyone looking to streamline their financial lives and work together toward common goals, with benefits that include more seamless money management, more flexible access in an emergency and more FDIC insurance coverage. Still, joint account holders are responsible for each other’s financial decisions, which could provide room to pause. Learn whether joint banking is right for you in our guide to the pros and cons of joint accounts.
About the writer
Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia’s expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.
Article edited by Kelly Suzan Waggoner
