What Are High-Yield Savings Accounts (HYSAs)?

Saving your money is important, especially for short-term goals. However, the average bank savings account interest rate in the U.S. is 0.46%, which means you’re likely not getting much in return for keeping your cash there. This is why many turn to high-yield savings accounts (HYSAs), which offer rates much higher than the average.

HYSAs are often a cornerstone short-term investment for many people. In this article, we’ll help you understand how these accounts work, why they yield so much, and what you should consider before opening one. This includes their pros and cons, as well as how you can choose one.

Understanding HYSAs

HYSAs are bank savings accounts that offer a significantly higher yield than the average. It operates the same as a typical savings account, where you deposit cash and begin earning interest each month according to the annual percentage yield (APY). Both banks and credit unions offer these types of accounts; however, many are via online platforms as opposed to brick-and-mortar locations.

Because the model is online, much of the overhead necessary to run any physical locations isn’t in play. This usually allows online banks to offer higher interest rates than normal. In some cases, HYSAs can generate interest at higher rates than both average savings accounts and some certificates of deposit (CDs).

You should also be aware that, because many HYSAs are online, your funds may not be as accessible as a brick-and-mortar bank. With this arrangement, you may receive a debit card or need to transfer cash to other financial institutions to use more readily. Some HYSAs, such as Wealthfront, integrate with robo-advisor tools so you can easily invest in other securities with a brokerage account.

Where HYSAs Fit into a Portfolio

In general, a HYSA serves as a short-term savings vehicle for investors. Returns, while modest in comparison to other investments, are consistent. Additionally, the funds in the account are highly liquid and are accessible virtually at any time.

An investor may use a HYSA as a safe place to park cash for short-term goals where they’ll need the money in one to five years, much like with a CD or money market fund. However, unlike CDs, which require you to lock your money away for a fixed term, HYSAs offer more flexibility, allowing you to access your funds without penalties. For example, if you’re saving for a house, it may make sense to keep a portion of your funds in such an account so they can remain liquid, while still gaining returns higher than from an average bank.

Moreover, a financial advisor might recommend you allocate funds to a HYSA as cash and cash equivalents in your portfolio. This asset class aims to help achieve diversification, helping to balance risk by providing a stable, liquid option that complements other more volatile investments, like stocks.

HYSAs vs. Other Short-Term Investments

There are many other highly liquid short-term savings instruments that can serve a similar role to a HYSA. However, they operate a bit differently than a typical bank savings account. Below is a breakdown of other options and how they stack up to a high-yield account:

Certificates of Deposit (CDs)

CDs are a prominent short-term investment option that allows you to earn higher interest rates on a deposit. In this arrangement, you must agree to put your money away for a fixed term at a set interest rate. The longer the term, the better rate you’ll typically receive.

For reference, the national average interest rate for a 12-month CD term was 4.38% in September 2024. At the same time, many HYSAs, such as Ally and Wealthfront, sit between 4% and 5% APY. The advantage of CDs, however, is that it allows you to lock in your interest rate. This keeps it unaffected by federal funds rate cuts that may occur during the term.

Money Market Funds

Money market funds are another highly liquid short-term option. These involve investing in a professionally managed portfolio that invests in short-term instruments, such as cash and cash equivalents and bonds. They regularly hover around 1.00 net asset value (NAV) per share, which heavily limits risk for investors.

Earnings from money market funds come from regular dividends and interest, which may outpace HYSAs. However, they aren’t FDIC-insured and require you to sell off shares in exchange for cash if need be.

Money Market Accounts

Banks also offer money market accounts, which tend to offer higher interest rates than both checking and savings accounts. On average, money market accounts earn about 0.64% APY. While a better option than some bank accounts, HYSAs tend to outperform them by a wide margin.

Short-Term Bond Funds

Short-term bond funds are a type of mutual fund that invests in bonds with short maturity periods. As an example, the Morningstar category average return for such funds was 8.71% for one year as of September 2024. This outpaces many HYSAs; however, they’re less liquid and aren’t FDIC-insured.

Pros and Cons of HYSAs

With returns that outpace other investments, HYSAs can be highly beneficial short-term savings instruments. They’re also liquid and typically FDIC-insured, which makes them a safe and stable option.

Keeping the benefits in mind, you should also weigh the downsides of keeping some or all of your money in a HYSA. First, be aware that interest rates can be fluid, rising and falling at the bank’s discretion or in response to the federal funds rate. Additionally, because they’re often online, you may not be able to simply walk up to an ATM to withdraw cash. It’s also possible for banks to set limits on withdrawals from the account and charge fees when you exceed them.

How to Open a HYSA

Opening a HYSA is a relatively simple process. You can do so through a variety of online and, in some cases, physical banks or credit unions. Once you select a financial institution, you can fund the account and begin receiving interest immediately.

It’s important, however, to ensure that a HYSA is offered through a legitimate bank with FDIC insurance. The standard is for banks to offer at least $250,000 of coverage for your money. Some financial institutions advertise high-yield accounts, but it’ll be up to you to assess the risks and read the fine print carefully before signing up.

Many well-known financial institutions offer HYSAs. Below is a list of several prominent examples (in no particular order) and their current corresponding interest rates:

Account	Interest Rate
Ally Savings Account	4%
Wealthfront Individual Cash Account	4.5%
CIT Bank Platinum Savings	4.7%
SoFi Checking and Savings	4.3%
Barclay’s Tiered Savings Account	4.5%

It may also be beneficial to look for a financial institution that offers a high-yield savings account in tandem with a robo-advisor tool. Firms such as Wealthfront and SoFi both offer such a service. This allows you to seamlessly transfer funds between accounts.

Frequently Asked Questions

What is the downside of a high-yield savings account?

One of the primary downsides of a HYSA is that its rates are always subject to change. For example, if the Fed decides to lower the federal funds rate, you can reasonably expect your bank to lower your APY. Another disadvantage of these accounts is that many are online, making it more difficult to quickly access your money, such as with an ATM.

Is my money safe in a high-yield savings account?

If you bank with a financial institution that offers FDIC-insured accounts, you can rest assured that your money is safe. Typically, the standard is for a bank to offer at least $250,000 in coverage.

Do you pay taxes on interest earnings from a high-yield account?

Interest earnings are taxed as ordinary income on your annual tax return. You’ll pay the federal government and, if applicable, your state according to your typical tax bracket.