Most high-yield savings accounts are online savings accounts that must be opened and managed online or with a mobile app. Some banks that offer high-yield savings accounts are online only, while others have physical branches that offer traditional savings accounts as well.

Online banks have lower overhead costs than traditional banks with physical branches, and they typically pass this savings to customers in the form of higher interest rates. This savings also allows online banks to offer accounts with low minimum balance requirements and no or low fees.

Online savings account rates have a long history with rates six to 10 times higher than traditional savings account rates. Currently, the average online savings account rate — an annual percentage yield (APY) of 4.40% — is close to 10 times the average savings account rate of 0.45% APY.

How do high-yield savings accounts work?

High-yield savings accounts pay interest just like traditional savings accounts. Interest typically accrues and compounds daily. At the end of each month, the total accrued interest for the month is credited to the account, making it available for withdrawal.

With compound interest, you earn interest on both the original amount and the interest earned from the previous period. Daily compounding maximizes interest earnings, but its effect compared with monthly compounding is minor. Its effects are a little more apparent on a high-yield savings account due to the higher interest rate.

For example, if a savings account has an interest rate of 5.00%, daily compounding results in an APY of 5.13%. For a $10,000 balance over one year, a 5.13% APY would result in $513 of interest, $13 more than what you would earn with a 5.00% interest rate and no compounding.

Are high-yield savings accounts safe?

Any savings account that you open at a bank insured by the Federal Deposit Insurance Corporation (FDIC) will be protected up to FDIC coverage limits. The FDIC insurance applies regardless of whether the account is opened at a physical branch of the bank or at a website owned by the bank.

Several credit unions also offer high-yield savings accounts. Credit unions have deposit insurance through the National Credit Union Administration (NCUA), and the coverage is essentially equivalent to FDIC insurance.

FDIC and NCUA deposit insurance protects accounts only if the financial institution fails. Federal regulations, however, limit your liability for losses on your savings account caused by certain forms of fraud. You’re responsible for notifying the bank of an unauthorized withdrawal in a timely fashion. Review your bank statements monthly to check for unauthorized withdrawals.

Pros and cons of high-yield savings accounts

A high-yield savings account can be useful for growing an emergency fund or working toward short-term goals. However, it has some disadvantages compared with other types of accounts. Here are the pros and cons to consider:

Pros:

• The interest rates of high-yield savings accounts are higher than the rates on other savings accounts. Often, they’re even higher than many certificate of deposit (CD) rates.
• High-yield savings accounts are bank accounts with federal deposit insurance and federal protections against loss from fraud.
• Unlike CDs, high-yield savings accounts allow multiple no-fee withdrawals per month.
• High-yield savings accounts can typically be opened and managed online or by a mobile app, with no physical branch visit required.

Cons:

• Like any savings account, the interest rate is variable and subject to change at any time.
• Access to your funds from a high-yield savings account is often limited to electronic transfers to and from an existing checking account.
• Customer service communication is typically limited to phone or online chat. In-person customer service at a physical bank branch is rarely an option.
• The number of withdrawals from a high-yield savings account is often limited to six per month, although some banks allow more.

How to choose a high-yield online savings account

The interest rate is only one of many factors to consider when choosing a high-yield savings account. Here are four important factors to weigh:

Interest rates. In addition to the current interest rate, look at the account’s rate history. Does it have a long history of above-average rates?

Account fees. Avoid high-yield savings accounts with monthly maintenance fees, even if the fees can be waived with a minimum balance. Also, watch out for fees for exceeding a certain number of withdrawals per month.

Deposit requirements. Most high-yield savings accounts have a minimum initial deposit requirement of $100 or less, but a few require $1,000 or more. Once opened, accounts may have different minimum balance requirements to earn the advertised interest rate or to avoid monthly service fees.

Access to your funds. Most banks allow you to link your high-yield savings account to your checking account. Using that link, you can electronically transfer funds. Make sure you review the features of a bank’s transfer system. Check the limits on the dollar amount of transfers, the limits on the number of transfers, the speed of transfers and the hold time before deposits will be available for withdrawals.

Alternatives to high-yield savings accounts

Some of the alternatives to high-yield savings accounts are similar, while others have key differences. Here are a few to think about:

Money market account. Like a high-yield savings account, a money market account is a bank account with deposit insurance. Money market accounts sometimes have limited check-writing privileges, while savings accounts rarely have check-writing privileges.

CD. A high-yield savings account often allows unlimited deposits and multiple monthly withdrawals without fees. A CD, however, typically permits only an initial deposit, with no additional deposits or free withdrawals until the CD term ends. Before the end of the term, withdrawals are limited and usually incur early withdrawal penalties. Another important difference is the variability of the interest rate. The interest rate is fixed on a CD until the term ends, while rates can change at any time on a high-yield savings account.

Money market fund. A money market fund is not a bank account. It’s a type of mutual fund that’s available from brokerage firms. It’s considered to have very low risk, but it’s not federally insured. Money market funds often have yields comparable to high-yield savings accounts. In certain situations, money market fund yields can be higher.

Average online savings account rate

The Online Savings Account Index is intended to provide a representative yield that’s available from today’s online savings accounts. The Index is the average yield of 10 mature online savings accounts from well-established online banks. Changes in the Index since 2017 have been tracked and compared with the federal funds target rate.

Methodology

The savings accounts in our rate table are ranked based on APY, with the highest APY listed on top. APYs are checked daily to ensure they match APYs listed on the financial institutions’ websites.

If the savings account has tiered rates, the APY listed is based on the deposit amount specified in the rate table’s filter box. If the deposit amount is below the minimum balance required to earn the APY, the account may not be listed. If the selected deposit amount is above the maximum balance to qualify for the APY, the account may also not be listed.

To be listed in our rate table, the savings accounts must be from either FDIC-insured banks or NCUA-insured credit unions. Also, the savings accounts must not require a checking account relationship to either open the savings account or qualify for the top-tier APY.

Frequently asked questions

How many high-yield savings accounts can I open?

There is generally no limit on the number of high-yield savings accounts you can open. However, some banks may reject your application due to ChexSystems if you have recently opened too many accounts at other banks.

Do you pay tax on a high-yield savings account?

Interest earned on savings accounts from banks or credit unions is typically taxed as ordinary income. Banks and credit unions are required to report all interest earned on Form 1099-INT when the total interest earned from all accounts during the previous tax year is at least $10.