Guide to High-Yield Savings Accounts

A traditional savings account is a simple investment vehicle designed to provide a high degree of protection,
relatively easy access to one’s funds, and a modest amount of interest. It, along with a checking account,
are the most common forms of bank accounts for consumers.

While a traditional savings account may be relatively simple, there are a significant number of differences
between the banking institutions that offer them and the features of any individual account. This article
explains those differences, and defines the related terminology, to ensure you can make an informed decision
when choosing an account.

Local Branch vs an Online Savings Account

One of the most important decisions when considering where to open a savings account is the choice between a
brick-and-mortar institution and an internet-only institution. The choice often comes down to personal
preference and how one intends to use the bank or credit union’s services. A local branch generally appeals
to consumers looking for the superior service available with face-to-face interaction, while an
internet-only bank generally appeals to consumers that prefer the superior convenience provided through an
internet-only bank’s online experience. A more detailed list of the various pros and cons of each option
follows.

Pros of a Brick-and-Mortar Savings Account

• Access to face-to-face bank tellers
• Generally free access to the bank’s ATM network
• Access to the bank’s branch services, such as foreign currency exchange and coin exchange
• May still have access to an online portal depending on the bank or credit union
• May still have access to mobile banking apps

Cons of a Brick-and-Mortar Savings Account

• Branch services are only available during business hours
• Online tools, when they exist, are often inferior to those of internet-only banks
• Generally offer lower interest rates on deposits
• Often charge higher fees

Pros of an Internet-Only Savings Account

• Provides superior online account management tools
• Generally provides superior mobile banking apps
• Banking tools and services are generally offered 24/7
• Generally offer higher interest rates on deposits
• Often charge lower fees
• Often offers ATM fee reimbursement, effectively creating the largest network of free ATMs

Cons of an Internet-Only Savings Account

• Lack of face-to-face options for service
• Lack of branch level services such as currency exchange
• Concerns about privacy and account security

Types of Savings Accounts

In addition to the traditional savings account that is familiar to most consumers, there are several
variations or completely different products that share the name “savings account”. A discussion of those
savings account variations and similarly named products follows.

High Interest Savings Accounts

High interest savings accounts, also called high yield savings accounts, have become increasingly common and
popular. There is no true difference between a high yield savings account and a traditional savings account
other than the interest rate paid on the deposit. While the interest rate can be many times higher than a
traditional savings account, the rates offered are still low when compared to historic rates. As a result,
the fees associated with an account can be as important as the interest rate offered. Learn more about the
typical fees by reading our section on savings account fees below.

When looking for the highest possible interest rate, it is helpful to fully understand APR vs APY, and the
effects of compounding. An explanation of those two topics follows.

APR vs APY

The terms APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are generally seen accompanying loan
and deposits products.

APR is computed as the periodic interest rate x the number of periods in a year, and is a term used for loan
products. The stated APR for a loan also often includes the costs associated with servicing a loan.

APY is the total rate of interest paid on a loan or deposit over an entire year (365 days). It takes into
account the compounding of interest over the year. This is the term one should see next to all rates
promoted for savings related products, and it enables consumers to make an apples to apples comparison of
the earnings between two products.

Compounding Interest

Compounding interest is a phrase that describes earning interest on previously earned interest, in addition
to interest on the original deposit. If one is earning a 1% APY on a $1000 deposit, their interest after the
first year would be $10, for a total of $1,010. If that person keeps the interest within the account, the
next year they would earn another $10.10. The additional $0.10 is the interest paid on the interest earned
during the former period.

Different savings products can compound in different ways. The most common is daily, but monthly and
quarterly compounding are also common. Since APY is used for deposits products, and the rate already
includes the effects of compounding, most consumers don’t need to concern themselves with the specific
compounding approaches of their accounts (although daily is generally preferable). Consumers can simply
compare the APY directly between accounts.

Below are some tables showing the impact of annual compounding at two different rates, for a period of 10
years.

Compounding Interest on a $1,000 Deposit at a 1% APY

Year	APY	Interest Paid	End of Year Balance
1	1%	$10.00	$1,010.00
2	1%	$10.10	$1,020.10
3	1%	$10.20	$1,030.30
4	1%	$10.30	$1,040.60
5	1%	$10.41	$1,051.01
6	1%	$10.51	$1,061.52
7	1%	$10.62	$1,072.14
8	1%	$10.72	$1,082.86
9	1%	$10.83	$1,093.69
10	1%	$10.94	$1,104.62

The impact of compounding at this rate produces an incremental $4.62, or 0.46%. This isn’t a large incremental gain,
but it is roughly equivalent to 5 months of additional yield on the initial deposit.

Compounding Interest on a $1,000 Deposit at a 5% APY

Year	APY	Interest Paid	End of Year Balance
1	5%	$50.00	$1,010.00
2	5%	$50.50	$1,060.50
3	5%	$53.03	$1,113.53
4	5%	$55.68	$1,169.20
5	5%	$58.46	$1,227.66
6	5%	$61.38	$1,289.04
7	5%	$64.45	$1,353.50
8	5%	$67.67	$1,421.17
9	5%	$71.06	$1,492.23
10	5%	$74.61	$1,566.84

The impact of compounding at this rate produces an incremental $66.84, or 6.68%. This is roughly equivalent to 15
months of additional yield on the initial deposit. As the APY increases, the impact of compounding also increases.

Joint Savings Accounts

A joint account is a bank account with more than one account holder. Any of the account holders have access to the
full funds of the account, not just the portion that they deposited. There are two types of joint accounts;
convenience accounts and survivorship accounts. With a convenience account, if the original depositor of the funds
becomes deceased, the account becomes a part of that depositor’s probate assets. If the account is a survivorship
account, the other account holder or holders take on ownership of the account.

Joint accounts are commonly created between couples, between parents and teenage children, and between adults and
their aging parents. Opening a joint account comes with several pros and cons, some of which are listed below.

Pros of a Joint Savings Account

• A central account to cover the shared expenses between a couple
• The ability to monitor the spending habits of the joint account holder
• Increasing the amount of FDIC coverage above the $250,000 limit for a personal savings account
• Ensuring immediate access to funds in the event of one account holder’s death

Cons of a Joint Savings Account

• One account holder may overspend any agreed upon limits
• Both partners are responsible for any fees associated with the account
• The entire balance can be subject to the creditors and debtors of any single account holder
• There is a lack of privacy between the account holders

Opening a joint account is not very different than opening an account for a single holder.

Children’s Savings Accounts

Many banks and credit unions offer special joint accounts for children, with unique promotions or incentives. These
kid’s savings accounts are often meant as a way for parents and the banking institutions to teach children about
banking and the benefits of saving and investing. Opening an account is as simple as most joint accounts, but it is
important to ensure the child has a social security number. Once the account is created, the cosigning parent is
often the only party that can make withdrawals.

There are a wide variety of promotions and incentives which can be offered on savings accounts for children. These
can often be higher interest rates on the balances, or interest rate incentives for routine deposits. Another
desirable feature is an account with no or low minimum balances and no or low account fees. For those who prefer a
local branch rather than an online account, the traditional passbook savings accounts may even be available,
depending on the banking institution.

Education Savings Accounts

Any savings account can be earmarked for educational purposes, but a traditional savings account misses out on the
tax benefits of a Coverdell Education Savings Account
(ESA). An ESA is an investment savings account which can be opened at many banks or credit unions. The money
invested in the account is tax advantaged, and any growth from those investments is tax free for the student when
used for qualifying educational expenses. The contributions to the ESA must be made prior to the student turning 18,
and the funds must be used prior to the student turning 30. Students with special needs have no limits on the age
when they may use the funds.

Funds contributed to an ESA can be invested in stocks, bonds, money market accounts, and other investments, much like
an IRA. The account can be used to pay for qualifying educational expenses at either public or private schools.
Those schools include elementary, secondary (middle and high schools) and higher education institutions (colleges,
universities and trade schools).

In order to quality for an ESA, one must meet the modified adjusted gross income (MAGI) limits. For 2016, those
limits are $110,000 if filing taxes individually, or $220,000 if filing jointly. The contribution limit is $2,000
per beneficiary, but those limits are reduced as the individual our couple making the investment approaches the MAGI
limit. The reduction, called a phase-out, begins occurring at $95,000 a year for an individual, and is linear. If
the investor earns halfway between $95,000 and $110,000, the contribution limit would be half way between $2,000 and
$0 ($1,000). It is possible to gift the money to the beneficiary and have them open an ESA for themselves, but we
recommend consulting a tax professional before considering such an action.

Health Savings Accounts

A health savings account (HSA) is specialized savings product for use in making qualified medical related payments.
The contributions to an HSA are tax advantaged, and generally reduce one’s income taxes. The funds within the health
savings account can be invested in a similar manner as an IRA. To qualify for an HSA, one must be enrolled in a
high-deductible health plan (HDHP) which is often considered a type of catastrophic health insurance.

HSA Contribution Limits for 2016

Type of Contribution	Contribution Limit
Individual	$3,350
Family	$6,750
Catch-up (ages 55 and older)	$1,000

These accounts are often confused with flexible spending accounts (FSAs). FSAs are not an investment, and generally
the funds deposited in an FSA must be used in the plan year they are deposited or be forfeit. A new rule under the
Affordable Care Act allows employers to allow $500 in FSA contributions to roll over from one plan year to another.

IRA Savings Accounts

An IRA savings account is a type of tax deferred retirement vehicle. The funds within the account can be invested in
a variety of ways, including stocks, bonds, mutual funds, money market accounts, and others. Most banks and credit
unions offer these types of accounts to their customers. There are two primary types of IRAs; traditional and Roth.

The traditional IRA’s contributions are tax deductible, up to an annual limit. The investments within the IRA are tax
deferred, and are only taxed when they are removed from the account upon retirement. The Roth IRA’s contributions
are not tax deductible, but the investment and earnings can be withdrawn tax free upon retirement.

Both types of IRAs have specific rules around contributions, and rules or penalties around early withdrawal before
retirement age. It is important to know the details about the benefits, rules and potential penalties of each before
investing.

Getting a Savings Account

Application Process

Submitting an application for a savings account is a relatively simple process. The application can be made in person
at a local branch, or often online or via the phone. There are a number of items that are typically required for the
application, which one would want to have available when starting the process. Those are:

• Social Security Number (SSN)
• Current address
• Email address
• A way of funding the new account, such as cash or the account and routing numbers for another account that can
  be used for a wire transfer
• Information from the joint account holder, when opening a joint account

Upon the approval of the account, a number of account documents should be provided. The bank or credit union will
also likely require a signature form, to ensure they have a valid copy of the account holder’s signature on file.

Reasons for Denial

While is seems counter-intuitive that a banking institution would turn down a new client depositing money in a
savings account, it can happen. The most common reasons for an account to be declined are:

• An error on the bank’s end
• Identification issues
• Negative banking history
• Bad or poor credit

Anytime an account is declined, the first recommended step would be to contact the bank for more clarity. If the bank
made any sort of error, direct communication provides the best possibility for a positive outcome.

If direct communication is not successful, the denied applicant can request a report from ChexSystems, which is a consumer reporting agency used by banks to check
the banking background of potential clients. A free copy of their report is available to consumers once every 12
months, thanks to the Federal Fair Credit Reporting Act.

Savings Account Features

ATM Cards and Access

An ATM card is a card provided by one’s financial institution that enables the user to access their accounts via an
automatic teller machine (ATM). They are used to access the account, obtain account information, make deposits, make
withdrawals, et cetera. A debit card is an ATM card that can also be used for purchases.

Banks generally permit free access to their ATMs from their customers. When using another bank’s ATMs, fees for each
transaction are typical. As a result, the availability of a bank’s ATMs is one consideration when choosing a bank
with which to open an account. Online banks often offer reimbursement for ATM usage fees, up to a monthly limit,
since they do not provide their own ATMs. Also, many merchants offer a cashback option during a purchase when using
a debit card, giving the account holder the ability to make a purchase and an account withdrawal in one transaction
and without ATM usage fees.

Overdraft Protection

An overdraft occurs when the available funds in an account falls below zero. This can often happen due to excessive
ATM or debit card usage, due to unanticipated bank fees, due to deposit delays, or due to a host of other reasons.
Banks will often allow an overdraft, and charge fees to the account holder as a result of the overdraft.

Many banks offer overdraft protection. Overdraft protection allows the account holder to link two or more accounts,
so that a lack of funds in one is covered by a balance transfer from another. This commonly involves a savings
account being used to cover overdrafts from a checking account, but other options exist, including using a credit
card’s cash advance option. Overdraft protection may be offered at no cost to the user, may be offered for a monthly
fee, or may be offered with a fee per transaction.

Online and Mobile Banking

Many traditional banking services are now available online and/or via mobile apps. This is particularly the case with
online banks, which may have no physical branches. Besides the ability to monitor one’s account and report on its’
history, mobile deposits and online bill paying have become very common. Online bill pay enables an account owner to
receive and pay bills online. Mobile deposits enable account owners the ability to deposit a check via their mobile
device, by taking a photo of the front and back of the checks. Other features often include balance transfer and
account administrative services.

Direct Deposit

A direct deposit is a deposit made directly into one’s account by the paying party. The most common instances are
businesses paying wages to employees, or paying bills to suppliers. Another common example is the payment of tax
refunds from state or federal governments. In order to setup a direct deposit, the paying party generally requires
the payee’s bank routing and account numbers. Both are commonly found on a check, so a voided check is often
requested by the payer. When the direct deposit is to an account other than a checking account, contacting the bank
is recommended to get the account and routing numbers.

The main benefits of direct deposits are speed and ease of deposit, when compared to the main alternative of a paper
check. Another benefit is that banks will often wave certain account fees when an account is setup to be the
recipient of direct deposits.

FDIC Insurance (and NCUA)

The Federal Deposit Insurance Corporation (FDIC) provides insurance on the
deposits made at its member banks. This insurance helps protect the individual making the deposit, and that
protection helps protect the bank from “runs” by its depositors when questions of the institution’s health arise.
FDIC insurance comes at no direct cost to the investor, or to US citizens. The member banks fund the insurance
corporation.

Qualifying deposits are protected up to a limit of $250,000. The qualifying deposits include those in savings
accounts, money market accounts, certificates of deposit (CDs), checking accounts, and others. Deposits at different
banks are separately insured, so deposit amounts above $250,000 can be split between multiple banks to provide
insurance for the entire sum. There are also different types of accounts, such as IRA accounts, which can be
separately covered above the $250,000 limit even when with the same bank.

Credit Unions are covered by the National Credit Union Administration (NCUA) rather than the FDIC. The NCUA operates an insurance
fund named the National Credit Union Share Insurance Fund (NCUSIF) which insures qualifying deposit accounts up to
$250,000.

Given the number of institutions participating in the FDIC and NCUA, it is highly recommended that any deposit made
be made with a participating bank or credit union. Before opening an account, be sure to research the institution
and confirm the insurance coverage offered.

Other Things to Consider in a Savings Account

Minimum Deposit and Balance

Most banks and credit unions will require a minimum deposit to open an account, and a minimum balance to be
maintained within the account. The penalties for failing to meet the minimum balance can range from account closure,
to lower interest rates, to additional fees. It is important to understand the implications of falling below the
minimum balance for any banking institution of interest, when deciding whether to open an account.

Banks and credit unions may use different methods to check whether the balance has met its minimum requirements.
Knowing these methods is just as important as knowing the minimum balance requirements. Some of the most common
methods are:

• Daily balance: does the balance fall below the minimum at the end of any day?
• Statement balance: is the balance below the minimum at the end of a monthly statement cycle?
• Combined balance between all accounts: does the balance of all a customer’s accounts fall below
  the daily or statement minimum?
• Average daily balance during a statement cycle: is the balance below the minimum for a given
  statement cycle?

Withdrawal Limits

Federal regulations limit the number of withdrawals from savings and money market accounts to 6 per month. This
includes transactions such as bill payments, overdraft protection transfers, wire transfers and electronic funds
transfers. ATM withdrawals and in-person withdrawals are not included in that limit, and there are no limits to
deposits made into the account. The penalty for exceeding this limit ranges from a warning, to a fee, to an account
being closed (normally after multiple warnings).

A typical work around is to open a checking account at the same institution, and to use it as the primary account for
any frequent transactions.

Fees

A bank’s fees are as important as its interest rates. Every bank is unique in the fees it charges, and the costs of
those fees, so it is very important to review them before opening an account. Fortunately banks provide customers
with ways to minimize of avoid many of these fees, typically by maintaining a specific balance in the account or
accounts. Below is a list of some of the common fees associated with savings accounts:

• Monthly service fees: a monthly fee for maintaining and servicing the account
• Minimum balance fees: a fee for dropping an account balance below the minimum
• Account closure fees: a fee for closing an account
• ATM fees: a fee for using another bank’s ATM (in addition to that bank’s usage fee)
• Bank teller fees: a fee for visiting a bank teller at a local branch
• Transaction limit fees: a fee for exceeding the maximum number of monthly transactions
• Overdraft fees: a fee for drawing the funds in an account below zero
• Statement copy fees: a fee for mailed, paper copies of account statements

Savings Accounts vs Other Deposit Accounts

Savings Accounts vs Checking Accounts

Checking and savings accounts differ in fundamental ways. Checking accounts are intended for frequent use of the
funds deposited, and are geared more towards services than earning interest. Savings accounts are intended for
infrequent use of funds, and offer higher interest rates at the expense of some of the ease of access to funds. A
brief comparison of the features for savings and checking accounts follows.

	Savings Accounts	Checking Accounts
Overview	An account designed for infrequent use of funds, risk free, and paying modest interest on deposits	An account designed for frequent use of funds, paying little to no interest on deposits
Interest Rates	Generally low	Generally very low or none
Fees	Generally lower	Generally higher
Minimum Balance Requirements	Generally lower	Generally higher
Withdrawal Limits	Generally 6 non-ATM withdrawals per month	Generally no limits
Offers Check Writing	Generally no	Yes

To learn more, please read our in-depth article on checking accounts.

Savings Accounts vs Money Market Accounts

Of all of the account type comparisons, money market accounts and savings accounts are the most similar. They are
both account types that offer a high degree of liquidity, are interest bearing, and are protected under FDIC or
NCUSIF insurance. Money market accounts tend to offer higher interest than savings accounts, although high yield
online savings accounts bridge that gap. Money market accounts also provide limited check writing in many instances.
Unfortunately money market accounts often require higher initial deposit amounts to open. A brief comparison of the
features for savings and money market accounts follows.

	Savings Accounts	Money Market Accounts
Overview	An account designed for infrequent use of funds, risk free, and paying modest interest on deposits	An account designed for infrequent use of funds, risk free, paying modest interest on deposits, and allowing limited check writing
Interest Rates	Generally low	Generally low, but higher than traditional savings accounts
Fees	Generally low	Generally low
Minimum Balance Requirements	Generally lower	Generally higher than savings accounts, but still relatively low
Withdrawal Limits	Generally 6 non-ATM withdrawals per month	Generally 6 non-ATM withdrawals per month
Offers Check Writing	Generally no	Often yes

To learn more, please read our in-depth article on money market accounts.

Savings Accounts vs CDs

A savings account and certificate of deposit have significant differences. The main difference is liquidity and
access to your funds. Savings accounts have relatively simple access via withdrawals, while CD funds are locked in
until the end of the CD’s term, when it reaches maturity. In exchange for the reduced access to funds, CDs earn a
higher rate of interest. CDs also tend to pay higher interest rates for higher deposit levels. A brief comparison of
the features for savings accounts and CDs follows.

	Savings Accounts	Certificate of Deposit Accounts
Overview	An account designed for infrequent use of funds, risk free, and paying modest interest on deposits	An account designed for higher interest at no risk, with no access to funds until the end of the CD’s term
Interest Rates	Generally low	Generally high when compared to savings and money market accounts
Fees	Generally low	Fees focus on early withdrawal before the end of the CD’s term
Minimum Balance Requirements	Generally low	Generally higher, with higher interest rates for higher deposit amounts
Withdrawal Limits	Generally 6 non-ATM withdrawals per month	Generally no withdrawals until the CD reaches maturity
Offers Check Writing	Generally no	No

To learn more, please read our in-depth article on certificate of deposit accounts.