A high yield savings account pays you interest on your balance, and the rate is usually much higher than what a traditional savings account offers

A high yield savings account (HYSA) is a savings account held at a bank or credit union where your money earns interest. The interest rate — called the annual percentage yield, or APY — is the percentage of your balance that the bank pays you each year. Most HYSAs currently offer APY rates between 4 and 5 percent, though this changes as the Federal Reserve adjusts its benchmark rates. A traditional savings account at the same bank might offer 0.01 percent or less.

The bank pays you this interest because it lends out the money you deposit to other customers. The difference between what the bank pays you and what it charges borrowers is how the bank makes money. When interest rates in the economy are higher, banks can afford to pay depositors more to attract their money.

You can deposit money into an HYSA and withdraw it whenever you need it, just like a regular savings account. There are no penalties for taking your money out early, though federal rules once limited you to six withdrawals per month — that rule was suspended in 2020 and has not returned. Your deposits are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) if the bank fails, or by the National Credit Union Administration (NCUA) if it is a credit union.

Key Takeaways

  • High yield savings accounts earn interest at a rate that changes based on what the Federal Reserve does with its benchmark rates, so your APY may go up or down over time.
  • Interest is usually credited to your account monthly, and you can withdraw your money and interest at any time without penalty.
  • Your deposits are protected up to $250,000 by federal insurance, whether the account is at a bank or credit union.
  • You pay income tax on the interest you earn each year, and the bank will send you a 1099-INT form to report it to the IRS.
  • Most HYSAs are held online and do not come with a debit card or checkbook, which is one reason the bank can offer higher rates.

How interest accrues and when you receive it

Interest in an HYSA is calculated daily based on your account balance. The bank takes your balance at the end of each day, divides the APY by 365, and adds that amount to your account. This happens every single day, so your interest compounds — meaning you earn interest on the interest you already earned.

Most banks credit the interest to your account once a month, usually on the last day of the month or the first day of the next month. Some credit it more frequently. You do not have to do anything to receive it; the bank adds it automatically. Once the interest is in your account, it becomes part of your balance and earns interest itself the next month.

The APY you see advertised is the rate the bank is currently offering. If the Federal Reserve raises or lowers its benchmark rate, the bank may raise or lower your APY in response. Banks are not required to pass along rate changes when ready, and they are not required to raise your rate as much as they lower it. When rates fall, your APY will likely drop within days or weeks.

Why APY changes and how to track rate movements

The Federal Reserve sets a target range for the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises this rate, banks have more incentive to offer higher APYs to attract deposits. When the Fed lowers the rate, banks lower APYs because they can afford to pay less. The Fed has raised rates significantly since 2022, which is why HYSAs now offer much higher rates than they did in 2020 and 2021.

You can track the Fed's actions by watching financial news or checking the Federal Reserve's website directly. The Fed meets eight times a year to decide whether to raise, lower, or hold its benchmark rate steady. After each meeting, it releases a statement explaining its decision. If you hold an HYSA, you do not need to do anything when rates change — your bank will adjust your rate according to its own policy.

Different banks respond to Fed rate changes at different speeds and by different amounts. Some banks raise rates quickly when the Fed acts; others wait weeks. Some banks lower rates faster than they raise them. If you want to keep earning the highest rate available, you may need to move your money to a different bank occasionally, though this takes time and effort.

Tax treatment of HYSA interest

The interest you earn in an HYSA is taxable income. You must report it on your federal tax return in the year you earn it, even if you do not withdraw the money. If you earn $10 in interest during the year, you owe income tax on that $10.

At the end of January each year, your bank will send you a Form 1099-INT showing how much interest you earned in the previous year. You use this form to report the income to the IRS. If you earned less than $10 in interest, the bank may not send you a 1099-INT, but you still owe tax on the interest if your total income requires you to file a return.

The tax rate you pay on HYSA interest depends on your overall income and tax bracket. If you are in the 22 percent tax bracket, you will owe roughly 22 cents in federal tax for every dollar of interest you earn. State income tax may also explore depending on where you live. This is one reason why the actual return on an HYSA is lower than the advertised APY — you keep only what is left after taxes.

How HYSAs differ from money market accounts and certificates of deposit

A money market account is similar to an HYSA but usually requires a higher minimum balance to open and may offer a slightly higher rate in exchange. Money market accounts sometimes come with a debit card or checkbook, which HYSAs typically do not. Both are FDIC-insured and both allow you to withdraw money whenever you want.

A certificate of deposit (CD) is different in a key way: you agree to leave your money in the account for a set period — usually three months to five years — and in exchange the bank locks in a higher interest rate. If you withdraw the money before the term ends, you pay a penalty, which is typically a few months of interest. CDs are useful if you know you will not need the money for a specific amount of time and want a may provide rate.

An HYSA gives you flexibility that a CD does not. You can withdraw your money anytime without penalty, and your rate can change. A CD locks in your rate but locks up your money. Which one makes sense depends on whether you might need the money and whether you want a may provide return or are willing to accept a rate that changes.

Minimum balances, fees, and account features

Most online banks that offer HYSAs have no minimum balance requirement to open an account, and some have no minimum to maintain the account. A few banks require you to keep a certain balance to earn the advertised rate — for example, you might earn 4.5 percent only if you maintain $25,000 or more. Read the account terms carefully to see whether a minimum applies.

Most HYSAs have no monthly maintenance fee. Some banks charge a fee if your balance falls below a certain amount or if you do not make a deposit within a set period, but these are uncommon among online banks. Traditional banks that offer HYSAs may charge monthly fees, so compare the fee structure along with the APY.

HYSAs typically do not come with a debit card or checkbook because they are meant for saving, not spending. You can transfer money out of the account to another bank account, or you can request a wire transfer or cashier's check. Transfers between your own accounts usually take one to three business days. Some banks allow you to link an HYSA to a checking account at the same bank for faster transfers.

FDIC insurance and what happens if the bank fails

Your deposits in an HYSA are protected by the FDIC up to $250,000 per account owner, per bank. This means if the bank fails, the FDIC will return your money up to that limit. If you have $50,000 in an HYSA at Bank A and $50,000 at Bank B, both are fully protected because they are at different banks. If you have $300,000 at one bank, only $250,000 is protected.

The FDIC insurance covers your principal balance plus any interest you have earned. If your account has $100,000 and you have earned $500 in interest, the total of $100,500 is covered. Bank failures are rare in the United States, and no depositor has lost money to a bank failure since the FDIC was created in 1933.

If you hold an HYSA at a credit union instead of a bank, your deposits are insured by the National Credit Union Administration (NCUA) under the same $250,000 limit. The protection works the same way.

Frequently Asked Questions

Can I withdraw money from an HYSA anytime I want?

Yes. You can withdraw your money and the interest you have earned at any time without penalty. There is no lock-in period. You can move the money to another account, request a wire transfer, or ask for a cashier's check. Transfers between accounts usually take one to three business days.

What happens to my interest rate if the Federal Reserve lowers rates?

Your HYSA rate will likely drop within days or weeks. Banks are not required to lower rates at the same speed they raise them, so some banks may drop faster than others. If you want to keep earning a higher rate, you can move your money to a bank offering a better rate, though this takes time and effort.

Do I have to pay taxes on HYSA interest?

Yes. Interest earned in an HYSA is taxable income. Your bank will send you a Form 1099-INT at the end of January showing how much you earned, and you report this on your tax return. The tax rate depends on your income bracket and state of residence.

Is my money safe in an HYSA?

Your deposits are protected up to $250,000 by the FDIC if the account is at a bank, or by the NCUA if it is at a credit union. Bank and credit union failures are extremely rare. Your money is as safe in an HYSA as it is in any other deposit account at the same institution.

What is the difference between an HYSA and a regular savings account?

The main difference is the interest rate. An HYSA typically pays 4 to 5 percent APY, while a regular savings account at a traditional bank might pay 0.01 percent or less. HYSAs are usually held online and do not come with a debit card or checkbook. Both are FDIC-insured and both allow you to withdraw money anytime.