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

A high yield savings account (HYSA) is a savings account offered by banks or credit unions where the interest rate is significantly higher than what you get from a standard savings account. The bank pays you interest on the money you deposit, and that interest compounds — meaning you earn interest on your interest. The catch is that these accounts are almost always held at online banks rather than brick-and-mortar branches, which is how they keep costs low enough to pay higher rates.

The interest rate on an HYSA changes over time based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks raise what they pay on savings accounts. When the Fed lowers rates, the rates on HYSAs drop too. This means the rate you see today will not be the rate you see in six months.

Money in an HYSA is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account holder per bank, so your deposits are protected even if the bank fails. You can withdraw your money whenever you need it, though some accounts limit how many withdrawals you can make per month without a fee.

Key Takeaways

  • High yield savings accounts pay interest rates that are typically five to ten times higher than regular bank savings accounts, though the exact rate varies by bank and changes when the Federal Reserve adjusts its rates.
  • These accounts are offered almost exclusively by online banks, which have lower operating costs and pass those savings to customers through higher interest rates.
  • Your money is FDIC insured up to $250,000, meaning your deposits are protected if the bank fails.
  • You can withdraw money at any time, but some accounts charge a fee if you make more than a certain number of withdrawals per month.
  • The interest you earn is taxable income and must be reported on your tax return.

How the interest rate is set and why it changes

Banks set their HYSA rates based on the Federal Reserve's benchmark interest rate, called the federal funds rate. When the Fed raises this rate, banks raise the rates they pay on savings accounts. When the Fed lowers it, banks lower their rates. The relationship is not one-to-one — a bank might raise its HYSA rate by 0.25% when the Fed raises rates by 0.25%, or it might raise by less, depending on how much competition the bank faces from other online banks.

Different banks pay different rates even when the Fed rate is the same. Some online banks compete aggressively for deposits and offer higher rates. Others offer lower rates because they have fewer customers or lower demand for deposits. You can compare current rates across banks on financial websites, but those rates change frequently — sometimes weekly.

If you open an HYSA when rates are high, do not assume that rate will stay the same. Rates have fallen significantly in the past, and they can fall again. An account that paid 5% one year might pay 3% the next year if the Fed cuts rates.

What you can and cannot do with an HYSA

An HYSA is designed for money you want to keep safe and earn interest on, not for everyday spending. You can deposit money whenever you want and withdraw it whenever you need it. However, federal rules historically limited you to six withdrawals per month before the bank could charge a fee. Those rules were relaxed in 2020, and most banks no longer enforce withdrawal limits, but some still do — so check your bank's policy before you open an account.

You cannot use an HYSA like a checking account. There is no debit card, no check-writing, and no direct deposit setup (though some banks now allow direct deposit). If you need to move money out, you typically transfer it to a linked checking account, which takes one to three business days. Some banks offer faster transfers for an extra fee.

An HYSA is best used for money you want to set aside for a specific goal — an emergency fund, a down payment on a house, a vacation, or money you are saving for something in the next one to five years. Money you will not need for longer than that might earn more in a certificate of deposit (CD) or other investment.

How much interest you actually earn

The amount of interest you earn depends on three things: the interest rate, how much money you have in the account, and how long the money stays there. If you have $10,000 in an account paying 4.5% annual interest, you earn about $450 per year, or roughly $37.50 per month. If the rate drops to 3%, you earn $300 per year instead.

Interest is usually compounded daily or monthly, which means the bank calculates interest on your balance and adds it to your account regularly. The more often interest is compounded, the slightly more you earn, though the difference is small. An account compounding daily at 4.5% will earn marginally more than one compounding monthly at the same rate.

The interest you earn is taxable income. At the end of the year, the bank sends you a 1099-INT form showing how much interest you earned, and you must report that on your tax return. If you earn $500 in interest and you are in the 22% tax bracket, you will owe about $110 in federal taxes on that interest.

HYSA versus regular savings accounts and other options

A regular savings account at a traditional bank typically pays between 0.01% and 0.05% annual interest. An HYSA at an online bank typically pays between 4% and 5.5%, depending on current market rates. Over a year, $10,000 in a regular savings account earns $1 to $5. The same $10,000 in an HYSA earns $400 to $550. The difference compounds over time.

A money market account is similar to an HYSA — it pays interest and is FDIC insured — but it usually requires a higher minimum deposit and may offer a debit card or check-writing privileges. The interest rate is often similar to an HYSA, sometimes slightly lower.

A certificate of deposit (CD) locks your money away for a set period — three months, six months, one year, or longer — and pays a fixed interest rate. CDs often pay slightly more than HYSAs, but you cannot withdraw the money without paying a penalty. An HYSA gives you flexibility; a CD gives you a may provide rate.

Fees and things that can reduce your earnings

Most online banks that offer HYSAs charge no monthly maintenance fee, no minimum balance requirement, and no fee to open or close an account. However, some banks do charge fees in certain situations. A few charge a fee if you make more than a certain number of withdrawals per month. Some charge a fee if your balance falls below a minimum. A few charge a fee to transfer money out to another bank.

Read the fee schedule before you open an account. A $5 monthly fee on a $10,000 account earning 4.5% interest wipes out most of your earnings. Some banks advertise no fees but then charge them for specific actions, so look for the fine print.

Inactivity fees are rare but do exist at some banks. If you do not make any deposits or withdrawals for a long period, the bank might charge a monthly fee. Again, check the terms before you open the account.

How to choose between different HYSA providers

The interest rate is the most obvious factor, but it should not be the only one. Compare the current rate, but also look at the bank's history — has it consistently offered competitive rates, or does it offer a high rate for new customers and then drop it? Check whether the bank charges any fees, what the minimum deposit is, and how easy it is to transfer money in and out.

Look at the bank's customer service options. Some online banks offer phone support, live chat, and email. Others offer only email or a contact form. If you think you might need help, choose a bank with support options you are comfortable with.

Make sure the bank is FDIC insured. You can check this on the FDIC website by searching for the bank's name. If the bank is not FDIC insured, your deposits are not protected if the bank fails.

You can open an HYSA at more than one bank if you want. Some people keep accounts at two or three banks to diversify and to take advantage of different rates or features. Just remember that FDIC insurance covers $250,000 per account holder per bank, so if you have more than $250,000 in one bank, the amount over $250,000 is not insured.

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 go down, which means you earn less, but you will not lose the money you put in. The only way to lose money is if you withdraw it yourself.

Is the interest rate may provide to stay the same?

No. Interest rates on HYSAs change frequently, usually weekly or monthly. When the Federal Reserve changes its benchmark rate, banks adjust their HYSA rates. A rate that is 5% today might be 3% in six months if the Fed cuts rates.

How long does it take to transfer money out of an HYSA?

Transfers to a linked checking account at another bank typically take one to three business days. Some banks offer faster transfers, sometimes same-day, but may charge a fee. Transfers within the same bank usually happen immediately.

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

Yes. Interest earned in an HYSA is taxable income. The bank sends 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 you owe in taxes depends on your tax bracket.

What happens if the online bank fails?

Your deposits up to $250,000 are protected by FDIC insurance. The FDIC will transfer your money to another bank or send you a check. You will not lose your money, though the process may take a few weeks.