What is a High Yield Savings Account?

Savings accounts come in several shapes, sizes and yields.  The term high yield gets attached to some of these accounts. It only means that high yield savings accounts have a higher interest rate than traditional savings accounts. Your money “yields” more money because of that.

However, one thing to keep in mind with a higher yield account is you may have to open the account with a higher amount; maintain a larger minimum balance and have a limited amount of withdrawals available to you each month.

Accounts that have high yields include online savings accounts, certificates of deposit (CDs), money market accounts and retirement accounts.

Online Savings Accounts

Often, online savings accounts have higher yields than brick and mortar savings accounts. This is because of the lower costs to operate an online bank. An example of a high yield online savings account would be one that offers a 1.29% annual percentage rate with no minimum balance and no monthly fees.

Certificates of Deposit

A certificate of deposit (CD) is basically a promissory note issued by a bank. It is a savings certificate that entitles the holder to receive interest on their deposit on a set maturity date. This is a time deposit which means that the interest will not be at its full yield until that date. Plus, if you withdraw the money prior to the maturity date, you will incur a penalty.

An example of this might be that you buy a $10,000 CD with an interest rate of 5% for one year. At the end of the year your deposit would be worth $10,500.

Money Market Accounts

A money market account is characterized by the fact that withdrawals (although they usually are limited) can be made with checks and with at ATMs. The money you deposit gets invested in money market instruments which accounts for the higher yield.

Retirement Accounts

Retirement savings such as an Individual Retirement Account (IRA) have higher yields because they generally get invested in higher yielding investment vehicles. Your money is supposed to grow at a higher rate (although losses are still possible).

These accounts can also have tax implications and because of that, withdrawals can result in penalties.

Whichever high yield savings account you select, find out if it is subject to being insured by the FDIC. Deposits at savings accounts at banks, are insured the FDIC up to $250,000.