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Understanding the DepositAccounts Online Savings Account (OSA) Index
The Online Savings Account (OSA) Index is intended to provide a representative yield that’s available from today’s online savings accounts. The Index is the average yield of ten mature online savings accounts from well-established online banks. The savings accounts must have at least two years of history with yields that have remained competitive. Promotional accounts are excluded from the Index so that consumers can learn what rates are reasonable to expect from online savings accounts. Changes in the OSA Index over the last two years are tracked and compared to the federal funds target rate.
Recent Changes in the DepositAccounts Online Savings Account (OSA) Index
The OSA Index had a large decline in April, but the decline was not as severe as March when the Index had its largest month-to-month decline since the start of the Index in 2017. Even though the March and April Index declines were large, the total reduction is still substantially smaller than the reduction of the federal funds target rate that came from two emergency FOMC meetings in the first half of March. In March, the OSA Index declined 16.5 bps, and in April it declined an additional 9.0 bps for a two-month decline of 25.5 bps. That has lowered the Index to 1.456%. In March, the upper range of the target federal funds rate fell 150 bps to 0.25%. The OSA Index continues to maintain a large lead over the target federal funds rate.
Most online banks have decided to avoid slashing their online savings account rates in response to the March Fed rate cuts. Instead, they appear to have a plan to transition to lower rates over several months.
During the period from June 1, 2019 to May 1, 2020, the online savings account in the OSA Index that had the largest yield decline was from FNBO Direct. Its online savings account yield declined 125 bps to 1.00%. The smallest yield decline was at American Express National Bank. The yield of its online savings account fell by only 60 bps to 1.50%.
As can be seen in the OSA Index, online savings account yields have generally followed the federal funds rate with some lag. This may change now that the federal funds target rate has fallen to near zero. After the 2008 financial crisis, the federal funds target rate was near zero from 2008 to 2015, and online savings account rates generally remained in a range of 0.70% to 1.00% for most of this period. Thus, the OSA Index may eventually stabilize later this year in a range that’s about 75 bps above the federal funds target rate range.
Savings Account Rate History – Average APY (%) Rate Trend Over Time
What is a savings account?
A savings account is defined by Regulation D of the Federal Reserve Board guidelines as a bank deposit for which there is no expiration date, nor a specific date on which it becomes payable to the depositor. Savings accounts are not considered “transactional” because the number of monthly withdrawals account holders are allowed to make is restricted — currently up to 6 withdrawals per month. Financial institutions pay varying degrees of interest in exchange for your deposits. Online savings accounts usually offer some of the highest interest rates on the market.
Banks use deposit accounts like savings accounts to help fund their operations, primarily lending. Banks charge interest on loans, and pay some of it back to you as the yield on your savings account.
You should know that Reg D also states that savings accounts have a “reservation of right” requirement: The financial institution may ask you to provide seven days’ advance written notice of an intended withdrawal. If you’ve made withdrawals from a savings account, you probably realize that this requirement is never put into practice. However, the regulations state financial institutions must reserve this right in the account agreement.
Savings account limitations
As noted above, savings accounts are limited up to six “convenient” transfers or withdrawals per month. This includes pre-authorized, automatic transfers, transfers and withdrawals initiated by telephone or computer and transfers made by check, debit card or other similar order made by the depositor and payable to third parties.
Transfers that are exempt from this limitation are considered less “convenient,” including withdrawals or transfers made in person at the bank, at an ATM, by mail or over the phone.
How to use a savings account
Earning interest on your long-term savings is the primary benefit of a savings account. They also help you better manage your money, and provide security for your cash stash.
When paired with a checking account, a savings account lets you segregate money for day-to-day spending from money you need to save for the long term. Keep the money required for everyday needs in your checking account, and leave the rest untouched in your savings account. If you already have a checking account, opening a savings account can serve as a backup to prevent overdrafts.
It’s relatively easy to make transfers to and from your savings account, depending on your bank. All transfers go through the Automated Clearing House (ACH), which takes one to two business days, with several banks allowing for almost immediate or one-day transfers.
Given the relative ease and convenience of making transfers into your account, you should set up automatic and recurring transfers to further your savings. You can customize these transfers for any amount you want — just check your bank’s transfer limits — and as frequent as you like. Account for savings in your budget, set it and forget it.
A wise budget strategy is to establish an emergency savings fund with enough money to cover at least three months of expenses. It’s especially important to keep your emergency savings separate and untouched from other accounts, so you’re not tempted to dip into funds reserved for emergencies. High-yield savings accounts are the best option for emergency savings, as you will earn a higher rate of return on your reserves.
Which savings account do I choose?
The number of savings account options available may make choosing one seem like a difficult task, so here are a few tips to help you find the right account.
For starters, look for the highest APY available. There’s a good chance that the financial institution with the highest rate is one you don’t recognize, but don’t be afraid to look beyond your usual bank. Besides, many of the most well-known big bank names are typically the ones offering some of the lowest rates. Plus, our listings always include verifiable banks that offer consistent rates.
Then be sure to check out the account’s minimum balance or minimum deposit requirement. You typically won’t find sky-high minimums with online savings accounts, but some of the highest-earning accounts may require minimums in the thousands. It helps to double check this figure before signing up. Don’t fall in love with a high rate, only to discover that it requires $25,000 to earn. Still, there’s going to be another great deal below that for your balance tier, especially thanks to offers from online savings accounts.
Avoiding fees should be part of your vetting process. Again, some accounts here may charge some fees, but there are also fee-free accounts, which is typically the case for online savings accounts.
Why should I look for the highest savings account rate?
Just as you trim extraneous expenses to save money, you should also choose a high interest rate to build your savings. It’s a natural part of any savings plan. Compare savings accounts regularly to ensure you’re finding the best deal for your money at any given time.
As mentioned above, the average savings account earns 0.28% APY in November 2019. Unfortunately, this percentage is largely weighed down by the majority of low-rate, brick-and-mortar banks. High-yield savings accounts are the outliers; you can even find savings accounts APYs hovering around 2.50%.
Let’s do a quick calculation and you’ll see there’s a lot to be gained just from opening a high-yield savings account. If you were to open a 0.28% APY savings account with $5,000, in a year, you’d be about $14 richer, assuming you don’t make any additional contributions. Boost that to a competitive 2.50% APY, and your yearly earnings jump to $126. Who wouldn’t want to earn that extra money just for having the right savings account?
Online vs. brick-and-mortar savings accounts
We get it, though. It’s much easier to just stick with the same bank you’ve worked with for years, even if their rate is miniscule. You might be apprehensive to make the switch to an unfamiliar bank name, especially an online one.
But consider this: The average brick-and-mortar savings account rate in June 2019 was 0.28%. This wasn’t a fluke: the average rate was 0.27% in March and 0.26% in December 2018. This is an optimistic average, too, with many of the biggest names in banking offering mere 0.01% returns on their savings accounts.
Meanwhile, the average online savings account rate was 1.69% in June 2019, up from 1.61% in March, and 1.52% last December. Quite a far cry from the low levels of brick-and-mortar banks.
Let’s say you stick with a brick-and-mortar bank that offers 0.01% APY. You start off with $5,000 and don’t make any more deposits into the account. A year goes by and you’ve earned a whopping 50 cents for your troubles.
Even if you boost your rate to the average 0.28%, you’d earn only $14 in interest over a year under the same circumstances. If you switched to the average online savings rate of 1.69%, you’d be earning $85 in a year. There’s a lot of money to be earned just by switching to an online savings account.
Why are online banks able to offer higher savings account rates?
Online banks get to save on the many costs of maintaining bank branches. This runs from paying rent for offices, teller salaries, equipment upkeep and cash security measures. Without those expenses, banks get to pass their savings onto their customers in the form of higher savings interest rates and lower-to-no fees.
Is it better to have a savings account with a bank or a credit union?
The choice between a bank and a credit union often comes down to personal preference. On average, banks and credit unions post similar savings account rates, with brick-and-mortar banks clocking in at 0.28% in November 2019, while credit unions are not far behind at 0.25% APY. Still, don’t forget that online banks could have way more earning potential than their traditional counterparts. Several credit unions also consistently top the charts with their own competitive rates.
For many, the big pull of credit unions is the sense of community they foster. When you join a credit union, you’re a member rather than a customer, which means you own a bit of the credit union along with other members. Credit unions membership requirements often take into account geographic location, professional communities, schools or places of worship. This further builds the sense of community you get from them.
Credit unions don’t necessarily lack the features of a big bank either. Credit unions still have accessible branches, and many are part of the CO-OP Shared Branch network, which gives members at over 3,500 credit unions access to 30,000 ATMs and 5,000 Shared Branches throughout the country. This is an even bigger reach than most of the big banks.
Fees to expect from savings accounts
The main fee to watch out for is a monthly service fee, comprising a basic charge for owning a savings account. It’s a pesky fee that can cost you as much as $15 a month, depending on the account, and it takes an unnecessary bite out of your savings. In many cases, a financial institution may waive the fee if you maintain a given minimum balance or make a certain number of transactions. Luckily, online banks often forgo charging a monthly fee, making for easier saving, which is one more argument in their favor.
There are several other possible fees you’ll want to watch out for, although these are typically triggered by certain transactions or actions on your part. This includes overdrafts, insufficient funds, incoming/outgoing wires and sometimes paper statements. These kinds of fees are typically avoidable, but you’ll need to know what your institution charges for to best avoid them.
How your money is protected in a savings account
In the most immediate sense, a savings account protects your money thanks to the security measures implemented by your financial institution. These include data encryption, internet firewalls, two-step authentication, regular fraud checks, and more. There’s often detailed information on an institution’s website regarding security measures that you can check out for extra peace of mind.
Money stashed in a savings account at a bank — and all other bank deposit accounts — is also protected by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures your deposits for up to $250,000 per depositor, per FDIC-insured bank, per ownership category in the event of bank failure. If you keep over $250,000 in one or multiple accounts at a single bank, any amount over the $250,000 limit could be lost in the event of a bank failure. Maximize your insurance by divvying up your cash among different banking institutions.
Credit union accounts get deposit insurance through the National Credit Union Administration (NCUA). If a credit union goes under, the NCUA will recap your losses through the National Credit Union Share Insurance Fund (NCUSIF). NCUA insurance automatically applies to federal credit unions, while state-chartered credit unions must request that insurance. Otherwise, state-chartered credit unions are regulated by the state supervisory authority where the credit union's main office is located.
Can I have multiple savings accounts?
There’s nothing preventing you from opening multiple savings accounts. In fact, it’s a favorable strategy, depending on your financial picture and savings goals. For example, having one savings account entirely separate from all your other accounts could serve as your emergency fund, leaving no room for temptation to dip into those funds. It could also allow you to better visualize your savings progress towards different goals: One account for emergencies, one account for vacation savings, one account for future college tuition, etc.
You may need to open several savings accounts if you have a lot of cash to sock away. Since FDIC insurance protects only up to $250,000 per account type, per institution, depositing any more than that into one savings account will leave the excess vulnerable in case of bank failure. Separating your funds between accounts can allow you to take full advantage of FDIC insurance.
Opening multiple accounts may also help you make best use of both sides of the banking world: online and brick-and-mortar. Having an online account helps you snag the more competitive rates out there, while having an account on the ground can help you maintain personal banking relationships or offer more physical access to your accounts.
Should I keep my checking and savings accounts with the same institution?
Keeping a savings account and a checking account with the same institution will certainly offer a degree of ease and convenience when it comes to account management. Typically, it means you can see both accounts on one online dashboard and make easy transfers between the accounts as needed.
However, you should keep in mind that FDIC insurance only covers you up to the legal limit. So if you have more than $250,000 in your checking and savings accounts, be sure to separate it between institutions.
You can also keep your accounts at different institutions depending on your preferences and needs. For example, you might want to keep your checking account at your local bank because of the ease of branch and ATM convenience. You can supplement that with another, interest-earning checking account and/or high-yield savings account online to snag their better rates.
Is savings account interest taxable?
Yes, savings account interest is taxable if you earn more than $10 in interest in a year. If that happens, your bank will send both you and the IRS a 1099-INT form that lists all the interest you’ve earned in a given year. However, even if you don’t receive a 1099-INT form, the IRS still requires you to report all the interest you’ve earned on your tax return. If you earn more than $1,500 in interest, you’ll also need to itemize the sources of that interest income on your return, using Schedule B of your 1040.
The taxes you pay in your earned interest are according to your marginal tax bracket. So if you fall into the 12% bracket and made $100 in interest in a year, you’d pay $12 in taxes on that income.
Alternatives to savings accounts
To complete your deposits picture, consider opening these other accounts alongside your savings account.
Money market account
Money market accounts are similar to savings accounts, but differ mainly in two ways: MMAs typically offer limited check writing, and have minimum balance requirements. Savings accounts typically do not include either feature.
MMAs are typically seen as hybrids of checking and savings accounts, thanks to their mix of features like check writing. MMAs may also include debit/ATM cards, much like checking accounts. What MMAs have in common with savings accounts, however, is that they’re also limited up to six certain transactions like transfers and withdrawals. Checking accounts aren’t limited by Reg D in that way.
Money market accounts earn interest, and historically earn at higher APYs than standard savings accounts. However, the latest Fed rate cuts and lower APYs at financial institutions means this may not be universally true when comparing the best rates available. Also, as a price for higher APYs, money market accounts often require much higher minimum balances than savings accounts typically do, and may even charge a monthly fee.
Money market accounts could be a valuable asset to have alongside savings accounts, especially because with debit or ATM cards, they offer more immediate access to your funds than a savings account.
Certificates of deposit
Certificates of deposit (CDs) are a different kind of savings account. They operate according to a set term, often ranging from three to 60 months, although several institutions offer some as short as seven days and as long as 10 years.
When you open a CD, you make your initial deposit, for which there is often a minimum requirement of either a few hundred or a few thousand dollars, depending on the bank. After that, you generally cannot touch that money again until it matures, or reaches the end of its term. You can receive interest payouts, but that initial amount, or the principal must sit in the account untouched.
With a CD, you’re essentially promising the bank you’ll keep your money on deposit with them for the entire term. Break that promise, and you’ll face an early withdrawal penalty, typically an amount of interest earned that depends on the term length and amount withdrawn. Some institutions do offer “no-penalty” CDs, however, that allow you to access your CD funds before its maturity date.
CDs generally do not charge a monthly fee. They can, however, require some pretty high minimum deposit requirements, so you’ll want to double check that requirement before you commit to opening an account.
CDs are good savings vehicles for longer-term savings goals since you’re holding that money for a year or longer, usually. This commitment also allows you to lock in high rates during rate peaks, and protect your money in that account against falling rate climates. CDs are also useful if you’ve already maxed out your other savings accounts.