Is There a Downside to High-Yield Savings Accounts?
Written by
Dawn Allcot
Edited by
Susan Kim
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With the average savings account interest rate at 0.47% APY as of March 18, and high-yield online savings accounts like those from Ivy Bank delivering rates as high as , depositing funds into a high-yield savings account might seem like a no-brainer.
However, there are certain disadvantages to high-yield savings accounts, including potential delays when you want to withdraw funds, variable interest rates and possible limits on monthly withdrawals. For most people, the benefits of a high-yield savings account outweigh the drawbacks.
Let’s explore the downsides to high-yield savings accounts so you can make the smartest choice for your financial future.
Drawbacks of a High-Yield Savings Account
In general, a high-yield savings account might seem like a smart financial choice. Your savings account is likely to deliver higher interest rates than an online checking account. Right now, All America Bank is offering an Ultimate Rewards Checking account with an APY of up to on balances of up to $15,000, but you must meet certain requirements to qualify.
In general, high-yield savings accounts deliver high APYs with fewer hoops to jump through. But that doesn’t mean they are perfect for every banking customer.
Delays on Withdrawing Funds
One of the biggest drawbacks to using a high-yield online savings account for emergency savings is that you might not be able to reach your money quickly — at least not without paying a fee. For instance, Capital One offers a APY* with its 360 Performance Savings account. But if you want to transfer money to an external account, it could take one to three business days.
This could be an advantage if you want to take time to consider whether or not you really need to tap into your savings account. But it’s not the best place to stow emergency savings for something like vet bills or car repairs, which you may need immediately.
The solution, of course, is to open an online savings account that offers a debit card or has a linked checking account that allows instant transfers. Capital One has this option, but not all online banks do.
No Access to In-Person Branches for Customer Service
You’ll find most of the highest interest rates at online banks, which means you won’t be able to visit a branch for in-person transactions or face-to-face customer service. Depending on the bank, you may or may not be able to deposit cash through an ATM, which means you might need a separate bank account to make an ACH transfer into your online savings.
Your Interest Rate Isn’t Locked In
Most savings accounts have variable interest rates, which means your earnings could fluctuate if the Federal Reserve drops the federal funds target rate, which drives other interest rates in the marketplace.
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A CD account, on the other hand, allows you to lock in today’s high rates for a set period of time, ranging from one month to 10 years.
Limited Withdrawals Before Fees
Some savings accounts charge fees if you make more than six withdrawals in a statement period. Read the fine print before committing to an account.
You May Not Earn a High Rate on Your Full Balance
Similarly, some banks put a limit on the amount of your balance that can earn the highest interest rate. This is called a tiered savings account. Balances above the limit will earn a lower rate.
FDIC Coverage Limits
Most banks only offer FDIC insurance coverage up to $250,000 per account holder, per account ownership category. That means you don’t want to put more than $250,000 in an account (or $500,000 in a joint account) since it won’t be protected if the bank fails or goes out of business.
How To Choose a Savings Account
Before you open a high-yield savings account, you want to look at more than just the annual percentage yield, which shows how much interest you’ll earn on your balance at the end of a year.
To help you find the best high-yield savings account for your needs, consider monthly fees, possible withdrawal penalties and accessibility to your money, whether that’s through ACH transfers or ATM withdrawals. Also find out if the bank has a required minimum deposit to open the account, a minimum balance requirement to avoid monthly fees, and any minimum balance required to earn the highest interest rates.
Finally, make sure you’re placing your money with a reputable financial institution that is insured by the Federal Deposit Insurance Corp. or, in the case of credit unions, the National Credit Union Administration.
Bottom Line
High-yield savings accounts offer many advantages, including interest rates higher than the national average right now. Just be aware of any limitations or fees before you open an account.
FAQ
- Can I lose money in a high-yield savings account?
- While your balance will continue to accrue interest and won't dip below your deposit, you can lose money in a high-yield savings account if you are subject to fees for frequent withdrawals or other reasons. Additionally, if your money isn't keeping pace with inflation, the money in your high-yield savings account will lose buying power.
- Is it worth getting a high-yield savings account?
- With interest rates as high as 5.30% today, it could be worth it to open a high-yield savings account to help you meet your financial goals. Just be sure you understand the drawbacks before deciding if this is the right choice for you.
- Is it bad to withdraw from a high-yield savings account?
- When you withdraw money from your savings account, you're diminishing your earnings and not taking full advantage of compound interest. However, often, pulling money out of savings is cheaper than charging up your credit card in an emergency. Just be aware of any charges and fees.
Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of March 22, 2024.
*Capital One interest rates accurate as of September 27, 2024. See website for all current rates.
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- FDIC. 2024. "National Rates and Rate Caps."
- FDIC. 2023. "Understanding Deposit Insurance."
