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Ultimate Guide to Understanding Annuities

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Annuities are a popular way for Americans to build their savings and then generate income after they retire. Annuities are a massive market: According to data from LIMRA, in 2018, total annuity sales were over $233 billion and the total amount of money held in deferred annuities was over $3 trillion.

But despite their popularity, annuities also have their fair share of critics, and there is no shortage of opinion pieces online calling them a bad investment. We asked David Haas, a Certified Financial Planner and president of Cereus Financial Advisors, whether annuities deserved this criticism.

“Annuities have a bad reputation because they are sold for the wrong reasons and some of them come with significant fees or are designed not to perform the way investors expect (and were promised),” he said. “The insurance industry also has used very poor sales practices in the past to earn this reputation.”

With that in mind, Haas still does think annuities have value. “Annuities can be useful tools in your financial strategy as long as you understand what they can do and what they can’t.”

To help you understand annuities, we’ve put together this guide to cover the key elements of saving through an annuity and spoke with multiple financial experts to get their advice.

How do annuities work?

Before we get into the specific types of annuities, let’s review the basics of how they work. First off, what are annuities? Annuities are investment contracts typically offered by insurance companies. They are not deposit accounts, and as a result are not covered by federal deposit insurance. This can make them a little riskier than deposit accounts like certificates of deposit, according to Ken Tumin, founder of LendingTree-owned DepositAccounts.com.

“CDs typically have federal deposit insurance up to coverage limits. Annuities do not have federal insurance guarantees,” he said. “Annuities do have state guarantees, but these are not as automatic as federal deposit insurance.”

However, annuities do have some advantages over deposit accounts which are split over the two phases of the contract: accumulation and distribution.

Annuity accumulation phase

To open an annuity, you’ll need to deposit money with the company selling the contract. This can be a single lump sum, multiple payments over time, or a transfer of money from another retirement/insurance account. If you aren’t ready to start spending down your savings, you can keep all your money in the account so it grows for the future. This is known as the accumulation phase.

Your money will grow over time, using the investment strategy picked by the type of annuity: fixed, variable or index. See the next section for more specifics on how these strategies work.

So long as your money stays in the annuity, you will not owe income tax on your investment gains. Tumin pointed out that this is one of the benefits of annuities versus CDs. “Earnings from annuities are tax deferred. CDs are not, unless they’re in an IRA.”

Once you are ready to spend down your savings, you ask the company to switch your contract to the distribution phase.

Annuity distribution phase

The distribution phase is when the annuity starts paying you back your contributions. You have a few different options. First, you could spread the payments over a set amount of time, like monthly payments over 10 years or 20 years. The company will tell you how much you’d receive per month based on your balance, age and expected investment return.

Another option is to set up your annuity so that it makes guaranteed payments over your entire life. The company is responsible for making sure it can keep up with all those payments, no matter how long you live. This is another key benefit, according to Tumin. “Unlike CDs, income annuities provide longevity insurance. Payments from an annuity can last until one dies. There’s no risk of your savings running out.” Finally, you can take some or all money out as a lump sum.

Your payouts are taxable income, but the amount that’s taxed depends on how you purchased the annuity. If you bought the annuity using pre-tax money, like through a 401k, then all your annuity income counts as taxable income. If you bought your annuity using regular, after-tax funds, then you only owe tax on your annuity earnings. You get your deposit back tax-free.

Additionally, if you take out a lump sum withdrawal of your earnings and/or pre-tax contributions before you turn 59½, the IRS will charge a 10% early withdrawal penalty on that amount. This is because annuities are supposed to be used to save for retirement. The penalty does not apply when you withdraw your after-tax contributions, though when you make a withdrawal, the IRS assumes your earnings are coming out first. If you schedule payments over time for at least five years or the rest of your life, you can also receive money from your annuity before you turn 59½ without the penalty.

Are there fees with annuities?

Annuities charge a number of fees. First, the company may charge several annual fees to cover the costs of running the annuity. These can be labeled as administrative fees, mortality fees, distribution fees and/or general fees. Altogether, the company may deduct between 0.3% to 2% from your annuity balance each year for these fees.

The investments in your annuity may also charge an annual fee and deduct it from your balance. Typical investment expense ratios range from 0.6% to 3% a year. These are similar fees you’d owe for making the investment outside of an annuity. Once again, the company will deduct the fee from your balance.

When you buy your annuity, you have the option to add extra benefits to your contract known as riders. For example, you can set up your annuity payments to grow based on inflation or to have a contract that pays your heirs a death benefit after you pass away. You would need to pay an extra fee each year for setting up these riders.

Finally, annuities are meant to be long-term investments and may have a fee if you cancel or withdraw your money early, known as a surrender charge. These can be quite expensive and go as high as 7% of your account balance. As time goes by, the surrender charge will decrease in size before ending completely after seven to 10 years, when you can take your money out penalty-free.

Are annuities liquid?

Annuities are not liquid investments because of the surrender charge. If you want to withdraw some or all of your balance, especially during the first few years after setting up your contract, you can expect to pay a steep penalty to cash out a lump sum.

Some companies offer a little extra flexibility with taking money out penalty-free. For example, they may allow you to withdraw up to 10% of your balance without the surrender charge. But even in this case, annuities are nowhere as liquid as a bank account or a regular brokerage account, where you can cash out your money without owing a penalty.

Three main types of annuity: Fixed, indexed and variable

In terms of investment strategies, there are three main categories of annuities: Fixed, indexed and variable.

 

Fixed annuity

Indexed annuity

Variable annuity

Rate of return

3% to 5% per year

Stock market returns with limits to your potential loss and gain. Usually comes with some small guaranteed return.

Based on your investments

Typical fees

Administrative expenses and surrender charges, but no investment management fees

Administrative expenses, surrender charges and investment management fees

Administrative expenses, surrender charges and investment management fees

Regulation

Only by state insurance commissioners

By the SEC and state insurance commissioners

Usually only by state insurance commissioners. In some cases, may be regulated by the SEC as well.

Taxation

Gains are tax deferred. Payouts are 100% taxed when the annuity was purchased with pre-tax money. Only gains are taxable if the annuity was purchased with after-tax money.

Gains are tax deferred. Payouts are 100% taxed when the annuity was purchased with pre-tax money. Only gains are taxable if the annuity was purchased with after-tax money.

Gains are tax deferred. Payouts are 100% taxed when the annuity was purchased with pre-tax money. Only gains are taxable if the annuity was purchased with after-tax money.

Fixed annuities

Fixed annuities pay a set return on your money. For the first few years, the company may guarantee a minimum return and after that, what you earn could change depending on market interest rates. With a fixed annuity, you cannot lose money because of your investment. It’s similar to putting your savings into a CD.

When it comes to generating retirement income, Haas noted that a fixed annuity can be more predictable. “Fixed annuities provide a simple guaranteed income stream, which is fixed for the payout period selected,” Haas said.

Variable annuities

With a variable annuity, you put your money into market-based investments, typically mutual funds with combination of stocks, bonds and money market accounts. The amount you earn will then depend on the market, so this can change dramatically year after year and your account balance can fall during market downturns.

Depending on your return, this can impact your monthly income during the annuity payout period. Haas pointed out that there are ways to get at least some stability to your payments though. “Variable annuities can attach guarantees for the income stream but come with increased expenses and restrictions on the investments,” he said.

Indexed annuities

Indexed annuities pay out a return that follows the stock market, with some additional safeguards and limits. When you sign up, you pick a market index that you want to track, like the S&P 500. Indexed annuities typically guarantee a minimum annual return — even if the market ends the year in the red, your funds still grow, usually around 2%.

In exchange, these annuities set restrictions on how much you can earn during good years. The annuity may cap your maximum possible return like you can earn no more than 6% per year. Another possibility is the indexed annuity only allows you to earn a portion of the total gains. For example, you keep 70% of your total investment earnings while the company keeps the rest. As a result, indexed annuities are safer than variable annuities but their upside is not as high.

Deferred annuities vs. immediate annuities

The insurance industry also classifies annuities as deferred versus immediate. Like the name implies, an immediate annuity starts paying you money back right away. There’s no accumulation period so the payout period begins right after you purchase the contract. They are also known as income annuities because they immediately turn your savings into a series of future income payments.

Deferred annuities do not start paying out right away. Instead, they have an accumulation period to build your savings for some point in the future.

Brandon Renfro, a financial planner and professor of finance at East Texas Baptist University, thinks immediate/income annuities can be a good choice for retirees. “Income annuities are simple and easy to understand. You exchange a lump sum of money for a guaranteed payment stream.”

Deferred annuities on the other hand may be a better fit before retirement, when you don’t need extra income and your goal is to build your nest egg so you have a larger future payout.

Cost-of-living adjustments for annuities

Some companies allow you to add an extra benefit to your contract called a cost-of-living adjustment (COLA) rider. When you buy a contract with this rider, you pick a percentage for how much your annuity payments will increase each year. If you selected 3%, your monthly payments will grow by 3% every year.

You could also buy a CPI-rider which adjusts your monthly payment based on the inflation rate. When inflation is high, your income will go up and when there is no inflation, your payments will stay the same.

With these riders, you protect your retirement income against rising prices from inflation. Over the past decade, inflation has been about 2%, according to the Bureau of Labor Statistics. If your payments stayed the same throughout retirement, you would see your purchasing power fall by the inflation rate over time.

Renfro warned that the cost of this feature can be prohibitive. “Some annuity payments will automatically include COLA provisions, but this is very rare,” he said. “Chances are, the price you’ll pay for an annuity with an inflation-adjusted payment will be considerably higher.”

The way this works is that for the same deposit, you’ll start out at a lower monthly income for an annuity with a COLA or inflation rider versus a regular annuity. In exchange, your payments will increase over time while the regular annuity will always pay out the same amount. You need to decide whether the inflation protection is worth the lower starting income.

Who insures and regulates annuities?

All annuities are regulated at the state level through the insurance commissioner’s office. Insurance companies and their representatives must register with the insurance commissioner in every state where they want to sell these contracts. The insurance commissioner will verify that the company is financially stable enough to meet its obligations and that it is following the rules for managing these plans. They also collect and investigate complaints against annuities.

In addition, the federal government regulates variable annuities through the SEC as these agencies oversee any investments based on the stock market. The federal government does not oversee fixed annuities and it rarely oversees indexed annuities.

Annuity bankruptcy

Despite these regulations, there is always the chance that your insurance company could go bankrupt and may not be able to pay you back according to the terms in your annuity contract. Annuities are not deposit accounts and not covered by the FDIC, so you are not guaranteed to get your money back.

Every state has its own insurance guaranty fund for when companies go bankrupt, but there’s a limit to how much they will pay out, typically $250,000 for annuities. If you are owed more than that, you can file a legal claim against the insurance company and try to collect as it liquidates its assets through bankruptcy, but there is no guarantee you’ll get the rest of your money. It can also take time to get your money through the court process.

In the end, while annuities are partially insured against, your best defense is to avoid getting into this situation in the first place. As part of your research, you should also check the credit rating of any insurance company through agencies like Standard & Poor’s or Moody’s. Consider only signing up with companies that have a strong rating to make sure they can safely pay you back.

Are annuities right for you?

To figure out whether an annuity is the right fit for you, you need to closely understand the rules and different types available. But figuring this out isn’t always easy for non-financial experts. For help with this decision, consider reaching out to a financial advisor.

As you interview candidates, you may want to ask whether the advisor gets a commission from selling the annuity. A common theme throughout our interviews was that annuities have a bad reputation because salespeople can get a large commission from selling them, so some bad actors pushed contracts that were not a great match for their clients. If you hire a fee-only advisor who is paid for their time and advice rather than a commission for selling products, that can help you avoid a conflict of interest.

In the end, annuities remain one of the few options to set up guaranteed retirement income that lasts your entire life which is why even with their potential drawbacks they are worth considering. By using the information in this guide and working with a trusted advisor, you can decide what role if any annuities will play in your financial plan.

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Banking

Best Savings Accounts

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Interest rates on savings accounts vary greatly, which means you need to shop around to find your best rate available. It’s possible to find rates reaching well past 2%, while the average savings account rate stands at around 0.27% (as of February 2020). This is why we check rates daily at more than 5,000 U.S. banks and credit unions, to make it easy for you to gain the best possible return on your savings.

A savings account is a key component of everyone’s financial life, but everybody needs something a little different from their savings account. That might mean you want to maximize your interest earnings, while others might need easy branch access. For that reason, we’ve outlined the best savings accounts in several different categories to better help you find the right one for your preferences.

So whether you’re shopping around for a new savings account or you need to open one for the first time, this comprehensive guide should help you get started. Below, you’ll find the best savings accounts to choose from, and a full brief on every aspect of selecting the right account for your needs.

Rates are accurate as of February 12, 2020

Best Savings Account Rates from Top Online Banks

Some people really put an emphasis on banking with a well-known, dependable bank that offers high rates and great features. For this reason, we’ve compiled a list of the big online banks that have had competitive rates for two consecutive years and either don’t require a minimum deposit amount or have a low minimum deposit amount requirement.

1. Barclays – 1.70% APY, no minimum deposit to open account

Barclays

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Member FDIC

Barclays originated in London over 300 years ago. In 1965, Barclays incorporated Barclays Bank in California, and in 1971, incorporated Barclays Bank of New York, where its Wealth unit is now based. While the bank has a presence in several U.S. cities, it settled its headquarters in Wilmington, Del. in 2001, where the online business currently resides.

While Barclays had been predominantly making a name for itself in the credit card space, the bank launched its online savings account in 2012 with a fairly competitive rate. Since its launch, the bank has remained consistent with its rate and even decided to up its game in March 2019 to compete with the other online banks. Today, Barclays holds on to a 1.70% APY, and doesn’t require a minimum amount to open the account or a balance to earn that APY.

You can fund the account by transferring funds via ACH, setting up direct deposit, mailing a check or uploading a picture of a check via the bank’s Deposit Checks feature. Be aware that Barclays may hold your deposited funds for up to five business days if deposited by check or electronically. If you fund the account via ACH or transfer from another bank, the funds will be available immediately. The maximum amount that you can withdraw or deposit is $250,000 per transaction.

If having the ability to bank at the palm of your hand is important to you, you’ll be happy to know that Barclays has a mobile app.

2. American Express National Bank – 1.70% APY, no minimum deposit amount

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Member FDIC

While this institution was established in 1989, American Express National Bank can trace its roots back to 1850 when its parent company, American Express, was originally founded. Not unlike Barclays, American Express is widely known for its credit card products.

With our sponsored advertiser, American Express National Bank, you can also open deposit accounts like its Personal Savings Account. Luckily for banking customers, the account historically offers good rates that consistently land it in top rankings. Today, you can take advantage of its 1.70% variable Annual Percentage Yield (APY) with any deposit amount. The account doesn’t charge a monthly fee, nor any fees for wires or to deposit checks.

This high yield savings account does not come with an ATM/debit card or checks. You can deposit money by mailing a check and make online transfers to and from your account. When pulling funds from your external bank, it will take five business days to appear in your account when you initiate the transfer from your Personal Savings account, and one to three when you initiate through your external account. Sending funds from your Personal Savings Account will take one to three business days no matter which side you initiate from. American Express Personal Savings is accessible online only; it does not have a mobile app.

3. Goldman Sachs Bank USA – 1.70% APY, no minimum deposit to open account

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Marcus by Goldman Sachs® is a brand of Goldman Sachs Bank USA that powers the bank’s online savings accounts, as well as its personal loans. Marcus launched its online savings account in 2016 with a competitive rate (at the time). While savings rates have fluctuated, continue to do so, this online brand has continued to offer a consistently competitive rate on its savings account. Today, the bank is offering a 1.70% APY. There isn’t a minimum deposit amount or balance requirement to earn the APY — plus, this account doesn’t come with any monthly fees either.

You can easily fund the account by either transferring your funds directly from a linked external bank account, setting up direct deposit, sending a check or sending a domestic wire transfer. While you can deposit as much as $1 million per account, you’ll only be able to transfer a maximum of $125,000 per outgoing transfer when initiated online. Marcus does give you the option to call its customer service number if you need to withdraw more than that amount. Keep in mind that you’ll be limited to making six certain withdrawals or transfers per statement period.

One downside to this online-only bank is that it doesn’t currently have a mobile app that allows you to conduct transfers, so you’ll have to conduct transfers on Marcus’ website. However, the online bank did join forces with Clarity Money, a personal finance app from Goldman Sachs Bank USA. Through Clarity Money, you’ll be able to monitor your account and manage your finances in a simple way.

4. Capital One — 1.70% APY, no minimum deposit to open account

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Turn to Capital One 360 for Capital One Bank’s more competitive rates. As an online-only operation, Capital One 360 accounts provide savers with higher deposit rates for better savings. They’re not just a flash in the pan either; Capital One remains one of our top picks for their consistently competitive rates.

The Capital One 360 Performance Savings earns a 1.70% APY on all balances. There’s no monthly fee, so your savings can grow in peace without the bank taking out a chunk. You can open the account with any deposit amount that works for you, as there is no minimum deposit nor balance requirement.

Capital One 360 accounts can be managed easily online, on the bank’s mobile app or at a Capital One Cafe or branch.

5. Discover Bank – 1.60% APY, no minimum deposit to open account

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Member FDIC

Known for its credit cards, Discover’s first card was first used in 1985. In that same year, Discover acquired Greenwood Trust Company, which officially changed its name to Discover Bank in 2000. Today, you can find several online banking products from Discover Bank, including certificates of deposit and a cashback checking account.

Dip into Discover Bank’s deposit offerings with its competitive Online Savings Account. There’s no minimum to open the account or start earning its 1.60% APY. Plus, interest is compounded daily and paid monthly for faster earnings. Discover also promises no fees so you can avoid fees on items like monthly maintenance, checks, returned deposited items, excessive withdrawals and insufficient funds.

Discover Bank is accessible solely online, which includes its mobile app, available both in the Apple App Store and Google Play. Its mobile app offers check deposit.

Best Rates from New Online Savings Accounts

Over the last year or so, there have been several new online banks being created by bigger banks or big banks introducing new online savings options. This list includes those banks that have either launched within the last two years or introduced a brand-new savings account with consistently high rates within the last two years.

1. North American Savings Bank (NASB) — 1.97% APY, $50,000 minimum deposit to earn APY

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Founded in 1927, North American Savings Bank is headquartered in Kansas City, Mo. It is a full-service bank with a range of deposit and lending products. You can find NASB locations in the Kansas City area.

NASB’s High Rate Savings account reserves its 1.97% APY for high balances between $50,000 and $5 million. Any balance outside of that range that will earn 0.10% APY instead. Whatever your balance, NASB guarantees your rate for six months after opening. You’ll need at least $50,000 to open the account. There is no monthly fee to worry about, and you will have to enroll in E-Statements.

You can access your account online, over the phone and through Mobile Banking, which includes Mobile Check Deposit.

2. Vio Bank – 1.85% APY, $100 minimum deposit to open account

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Vio Bank is an online division of MidFirst Bank which was founded in 1911.

Vio Bank has certainly been a recent stand-out candidate for its competitively high rates on its CDs as well as its High Yield Online Savings Account. It currently earns 1.85% APY and compounds interest daily for better savings. Plus, there’s no monthly fee. You will need at least $100 to open the account. It’s better to stick to electronic statements here, because paper statements cost $7 each.

Vio Bank doesn’t provide debit cards or check writing capabilities on its High Yield Online Savings Account or any other accounts. Instead, you’ll have to make online ACH transfers. Deposits into the account may take five or more business days. You’re limited to $25,000 daily and $100,000 monthly on transfers to and from external accounts initiated by Vio Bank. There aren’t any limits on transfers initiated outside, though. You can fund your High Yield Online Savings Account by mailing a check, depositing a check on mobile or sending an incoming wire.
In addition to its online presence, Vio Bank extends itself to a mobile app, as well, which allows you to manage your accounts and make transfers on the go. It is available in the Apple App Store and Google Play Store.

3. CIBC USA – 1.85% APY, $1,000 minimum deposit to open account

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Member FDIC

CIBC, or Canadian Imperial Bank of Commerce, began as two Toronto-based banks: The Canadian Bank of Commerce (founded in 1867) and the Imperial Bank of Canada (founded in 1875) — the two banks merged in 1961. CIBC expanded into the U.S. in 1991 with CIBC U.S., and established its headquarters in Chicago. You can find CIBC USA locations in Illinois, Michigan, Missouri and Wisconsin.

The online-only CIBC Agility™ Online Savings Account offers a competitive 1.85% APY on all balances, although you’ll need at least $1,000 to open an account and get started. It does not charge a monthly fee, so your savings can keep growing uninterrupted.

To withdraw funds from your account, you can make transfers between accounts (both internal and external) or submit a request in writing for a check to be issued in your name. To deposit money, you can also make ACH transfers or send a cashier’s or personal check to CIBC USA in either the bank’s name or your name. Check deposits are placed on a 10-day hold.

In addition to online account access with CIBC NetBanking, you’ll also have further on-the-go access with the CIBC US Mobile Banking App.

4. HSBC Direct – 1.85% APY, $1 minimum deposit to open account

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Member FDIC

HSBC Direct is the online-only offering from HSBC Bank USA, which traces its history back to the Hongkong and Shanghai Banking Corporation Limited in 1865. As part of HSBC Bank USA, the HSBC Direct Savings account earns a competitive 1.85% APY on all balances. You must open an account with at least $1 in new money, meaning money not already on deposit with HSBC. There is no monthly fee to worry about here.

HSBC Direct provides Money Management Tools that are designed to help you manage your money, set goals and stick to a budget. This includes email alerts for bills, low balances and fees, customizable goals and comparable income and spending.

When you have an HSBC US account, you can pay bills and make transfers and other payments in the Move Money section. Transfers in and out of the account typically take three to five business days to clear. Deposits into the account are limited to $3,000 daily and $5,000 monthly. An ATM or debit card is not included with this account.

Take advantage of the HSBC Mobile Banking App for further accessibility, like mobile check deposit. You can find it in the App Store and Google Play.

5. Citizens Access – 1.85% APY, $5,000 minimum deposit to open account

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Member FDIC

Citizens Access is the online-only branch of Citizens Bank, a Providence, R.I.-based bank founded in 1871.

Unlike its other competitors, Citizens Access has a bit of a higher minimum deposit to open its Online Savings Account, requiring $5,000. If you can meet that threshold, you can start earning at its 1.85% APY, but balances under $5,000 will drop to 0.25% APY. Citizens Access boasts zero fees, including for monthly maintenance.

To make a deposit into the Online Savings Account, you can make an online funds transfer or deposit a check through the mail or mobile check deposit; withdrawals are made in the same ways. When moving money from your Online Savings Account, it can take two to three business days for the funds to post in the external account.

Citizens Access doesn’t have a mobile app, but the website is designed to be easily accessible on mobile, including mobile check deposit capabilities.

Best High-Yield Savings Accounts

If the feature you care about the most is the rate a bank offers on a savings account, this list is for you. These banks are currently offering the highest savings account rates.

1. FitnessBank – 2.20% APY, $100 minimum deposit to open account

FitnessBank

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on FitnessBank’s secure website

Member FDIC

Personal goals often revolve around health and money and Fitness Bank seeks to seamlessly bring those together. Fitness Bank is a division of Affinity Bank, which was founded in 2002.

The Fitness Savings Account earns interest on balances over $100. The exact APY you earn on your Fitness Savings Account depends on your average daily step count which is calculated each month. The top rate of 2.20% APY is reserved for customers who log 12,500 steps or more. The rate drops to 2.00% APY for an average daily step count between 10,000 to 12,499; to 1.75% APY for 7,500 to 9,999 steps; and to 1.25% APY for 5,000 to 7,499 steps. Finally, the rate plummets to 0.50% APY if you’re logging 4,999 or fewer steps. When you open a new account and have at least $100, the account will have an initial APY of 2.20% until the rate adjustment date after the first full month.

You need at least $100 to open a new Fitness Savings Account. You must also maintain a $100 minimum average daily balance in order to waive the $10 maintenance fee. There is no fee for incoming wires. You can deposit money into your account through online transfers, which typically take three to five days to post.

To track your steps, you will need to download the FitnessBank Step Tracker app. Then you can link it with your Garmin, FitBit, Apple Health or Google Play.

2. Elements Financial — 2.10% APY, $2,500 minimum deposit

Elements Financial

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NCUA Insured

Elements Financial is a credit union founded in 1930 by the management of Eli Lilly and Company. Today, membership is open to employees of more than 140 partner organizations in the U.S., as well as family and household members of eligible members.

New Elements Financial customers can open a new Helium Savings account to snag its 1-Year Promo 2.10% APY on balances of $2,500 and over (maximum $250,000). After you’ve had the account for 12 statement cycles, your money will grow at 1.30% APY (as of writing). Your opening deposit must be made with new money not already held with Elements Financial. There’s no monthly maintenance fee on the account.

3. BrioDirect – 2.00% APY, $25 minimum deposit to open account

BrioDirect

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FDIC Insured

For the next best high-yield savings rate, head to BrioDirect which doesn’t require any physical commitment from you. BrioDirect is an online brand of Sterling National Bank, founded in 1888, which manages and holds your accounts.

Open a BrioDirect High-Yield Savings account with just $25 to start. You’ll also need to maintain at least $25 in the account to earn the 2.00% APY. There is no monthly fee and the only other posted fees are a $10 excessive transaction charge and a $35 overdraft/insufficient funds fee.

You can transfer money between your BrioDirect savings account and other accounts using the bank’s External Transfers feature online or by calling the bank. You can also fund the account by wiring the money or sending a check. There isn’t a BrioDirect-branded mobile app, but you can use Sterling’s Personal Mobile Banking app to manage your accounts.

4. First Foundation Bank — 2.00% APY, $1,000 minimum

First Foundation Bank

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Member FDIC

Founded in 1990, First Foundation Bank is headquartered in Irvine, Ca. and has 20 locations in California, Hawaii and Nevada.

First Foundation Bank’s Online Savings account sets itself apart from the bank’s other offerings with its competitive 2.00% APY on balances $1,000 and over. Balances under that earn 1.00% APY. You’ll need to open a new account with at least $1,000 in new money, or money not already held on deposit with the bank.

You can access your Online Savings account online and on mobile to pay bills, deposit checks, transfer money and more.

5. Prime Alliance Bank — 1.96% APY, $10,000 minimum balance to earn APY

Prime Alliance Bank

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Member FDIC

Prime Alliance Bank was founded in 2004 and is headquartered in Woods Cross, Utah. This is its one location that you can bank at, otherwise reachable over the phone, email and fax.

Prime Alliance Bank’s Personal Savings account earns its competitive 1.96% APY on balances $10,000 and over. Balances between $1 and $9,999 will earn 1.86% instead, which is still a solid rate at which to grow your money. There is no monthly fee on the account.

You can access your account online and on mobile, where you can use Mobile Deposit to deposit checks remotely.

Best Savings Account Bonus Offers

Some banks offer cash bonuses to bring in new customers. There are often requirements that need to be met in order to qualify for these bonuses, so you’ll want to pay attention to those prior to applying. This list includes banks offer bonuses for opening a savings account.

1. Discover – $200 bonus with $25,000 minimum deposit + 1.60% APY on all balances

Discover Bank

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Member FDIC

Largely known for its credit cards, Discover also offers an array of high-yield deposit accounts. With roots as the Greenwood Trust Company, founded in 1911, Discover Bank came into being by name in 2000.

You have until January 6, 2020 to open a new Discover Online Savings Account and redeem this bonus offer. If you deposit at least $15,000 into the new account by Jan. 20, 2020, you’ll earn a $150 bonus. Deposit at least $25,000 by the same date, and you’ll earn a $200 bonus. If you qualify, the bonus will be deposited by Feb. 3, 2020. You can apply online or by phone using the code MM1219.

The account itself earns at a solid 1.60% APY, and interest is compounded daily. There are no minimum deposit or balance requirements or a monthly fee.

2. Citibank – $700 bonus with $50,000 minimum deposit

Citi

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on Citi’s secure website

Member FDIC

Citibank got its start way back in 1812 as the City Bank of New York. Part of the larger Citigroup, Citibank offers customers deposit, lending and investing products for both individuals and businesses. Citi has a physical presence in 98 countries, including in 12 U.S. states plus Washington D.C. Citibank’s headquarters are located in Sioux Falls, S.D.

You have until March 21, 2020 to snag this huge $700 bonus offer from Citibank. To earn the bonus, open a Citi Priority Account Package and deposit at least $50,000 in new money within 30 days of opening the new account. New money means the funds must be held outside of Citibank to qualify. You must maintain at least $50,000 between the checking and savings accounts in the Package for 60 consecutive calendar days to qualify.

The Citi Priority Account Package charges a $30 monthly fee, which you can waive by keeping a combined average monthly balance of $50,000 or more in eligible linked accounts. As a premium account, the Citi Priority Account Package includes access to Citi Personal Wealth Management, relationship rates, free and unlimited checks and more. Its Interest Checking account earns 0.03% APY and the Citi Savings account earns between 0.04% and 0.15% APY, depending on your balance. Higher balances earn higher rates.

3. Citibank – Up to $500 bonus with $15,000 minimum deposit

Citi

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on Citi’s secure website

Member FDIC

Based in Sioux Falls, S.D., Citi traces its history back to New York City in 1812. Snag a $400 reward from Citibank by being a new customer and opening a Citibank Account Package by March 31, 2020. Deposit at least $15,000 in either the checking or savings account within the package within 30 days of opening the account. The money must be new to Citibank and kept across both accounts for 60 days. Add an extra $100 to your reward by making at least one qualifying direct deposit each month for two consecutive months within 60 days of account opening for a total bonus of $500.

The Citibank Account package includes both the checking and savings account. There is a $25 monthly fee which you can waive with a $10,000 minimum balance across both accounts. The checking account earns a 0.01% APY, and the savings account will earn between 0.04% and 0.13%, depending on your balance. Citibank offers a mobile app to access your accounts.

4. Associated Bank — $400 bonus with $25,100 minimum deposit

Associated Bank, NA

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Member FDIC

Associated Bank was founded in 1970 when three Northeast Wisconsin banks merged. It is headquartered in Green Bay, Wisc.

Earn a $400 bonus when you open both an Associated Choice Checking account and an Associated Relationship Savings account by June 30, 2020. Open the Choice Checking account with at least $100. You must also make three payments through Associated Bank Online Bill Pay or at least one direct deposit of $300 or more within 45 days of account opening. Open the savings account with at least $25,000. You must maintain a $25,000 minimum combined balance between the two accounts for 90 days to receive the reward 120 days after account opening.

Email yourself a coupon code from the offer page to bring into a branch to redeem. Your new accounts must be funded with new money not already held with Associated Bank. Associated Bank employees and customers who already have or have had a checking account or Associated Relationship Savings account at Associated Bank within the last six months are not eligible for the offer.

The Associated Choice Checking account earns between 0.01% and 0.02% APY, where higher balances earn higher rates. There is a $25 monthly fee, which you can waive with at least $10,000 in combined deposit accounts or either an HSA or investment account. The Associated Relationship Savings account earns according to balance tiers, between 0.10% and 1.30% APY.

5. Chase – Up to $350 bonus with $10,000 minimum deposit and direct deposit in a qualifying checking account

Chase Bank

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on Chase Bank’s secure website

Member FDIC

Established way back in 1824, Chase is headquartered in Columbus, Ohio. It has a presence in 33 states and Washington D.C.

Another checking and savings mix-and-match bonus, you have until April 20, 2020 to open a new Chase Total Checking account. Once it’s open, setting up direct deposit will snag you a $200 bonus. Earn another $150 when you open a Chase Savings account and deposit at least $10,000 in new money within 20 business days. You must also maintain that balance for at least 90 days.

The accounts themselves aren’t too remarkable. The Chase Total Checking account charges a $12 monthly fee unless you have direct deposits totaling $500 or more, a minimum $1,500 balance at the beginning of each day or a $5,000 average beginning day balance in combined account balances. The Chase Savings account also charges a fee, $5 per month, that you can waive with a minimum $300 balance at the beginning of each day, at least one repeating automatic transfer of at least $25 or more from your personal Chase checking account or Chase Liquid® Card, a linked Chase College Checking account for Overdraft Protection, an account owner younger than 18 or a qualifying linked account. Chase provides users with a mobile app to manage accounts.

Best Savings Account Rates from Credit Unions

Some people prefer to do their banking with credit unions because of the member benefits that extend beyond the deposit accounts. This list includes credit unions that currently offer the best savings account rates for low and high depositors.

1. Digital Federal Credit Union – 6.17% APY, up to $1,000 account balance

Digital Federal Credit Union (DCU)

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NCUA Insured

Chartered in 1979, Digital Federal Credit Union is based in Marlborough, Mass. and is the largest credit union headquartered in New England by asset size. Eligibility for DCU membership is based on your family relationship to a current member, the company you work for or retired from, an organization you belong to or a community you’re a member of (where you live, worship, attend school, etc).

DCU offers its members a whopping 6.17% APY on its Primary Savings account. However, this high APY applies to the first $1,000 in your account. Everything over that will earn 0.25% APY. The account requires a $5 opening deposit and balance to maintain membership. There is no monthly service fee.

Transfers through DCU’s Payment Center impose a minimum amount of $0.01 and maximum amount of $2,500.

DCU offers account access through branches (both DCU and CO-OP), online, at ATMS and over the phone. There is no mobile app.

2. Blue Federal Credit Union — 5.00% APY, $25 minimum deposit

Blue Federal Credit Union

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on Blue Federal Credit Union’s secure website

NCUA Insured

Blue Federal Credit Union formed in 2016, as a merger of Wyoming-chartered Warren Federal Credit Union and Colorado-based Community Financial Credit Union. Blue has locations in Colorado and Wyoming, as well as thousands more CO-OP Shared Branches around the country.With a Blue Federal Credit Union Accelerated Savings account, it’s best to keep a maximum of $1,000 in the account. Balances between $25 to $1,000 maintain the high rate of 5.00% APY, while anything over $1,000 drops to 0.10% APY. To earn dividends at all, you must maintain a $25 minimum balance and make a transfer of at least $5 per month into the account. Dividends are calculated daily and paid monthly.Blue Federal Credit Union is accessible in person, over its 24/7 call center phone line, online and on mobile.

3. St. Mary’s Bank — 5.00% APY, $25 minimum deposit

St. Mary's Bank

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on St. Mary's Bank’s secure website

Founded in 1908, St. Mary’s Bank is headquartered in Manchester, N.H. It was the first credit union founded in America, known then as St. Mary’s Cooperative Credit Association. All its locations are in New Hampshire, but membership is open to anyone who purchases one share of capital stock for $5.

For higher-than-usual savings at St. Mary’s Bank, look to its Rainy Day Savings account. It gives a big 5.00% APY boost to balances $25 – $499. Balances between $500 and $999 earn 3.00% APY, remaining competitive, but balances $1,000 and over drop to a mere 0.05% APY. To earn interest, you must make a monthly automatic transfer of at least $25 from direct deposit or a St. Mary’s Bank checking account.

Almost quite literally meant for rainy day savings, this account limits you to one free withdrawal per month. Each subsequent withdrawal will cost $2. There is no monthly fee on the account.

St. Mary’s Bank is accessible online, over the phone, at branches and through its free mobile banking app, available for Android and Apple devices.

4. CommunityWide Federal Credit Union – 1.90% APY, $1 minimum deposit to open account

Communitywide Federal Credit Union

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on Communitywide Federal Credit Union’s secure website

NCUA Insured

CommunityWide Federal Credit Union was founded in 1967, originally known as West Washington Association Federal Credit Union, settling into its current name in 1985. Based in South Bend, Ind., CommunityWide opens membership up to employees/retirees/donors of select employer groups, relatives of qualified members and members of select charity groups.

The Funds account from CW is a unique approach to savings. You’re allowed to make a withdrawal from the account between the 1st and 5th of each month; any withdrawals outside of that period are subject to a penalty of seven days’ dividends. Complying with this account’s requirements allows you to earn at 1.90% APY, a higher rate than the credit union’s standard savings account. You need only $1 to open an account and there is no monthly fee to maintain the account.

In addition to online access, CW provides mobile access either through your browser or its mobile app available for iOS and Android, which allows for check deposit.

5. USALLIANCE Financial – 1.70% APY, $500 minimum balance amount

USALLIANCE Financial

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on USALLIANCE Financial’s secure website

NCUA Insured

USALLIANCE Financial was founded in 1966 by a handful of IBM employees. Today, it opens up membership to various neighborhoods in the New York City metro area, select schools, houses of worship and members of certain community-oriented organizations.

The High Dividend Savings account earns 1.70% APY and compounds interest daily. You’ll need to open an account with at least $500 and maintain a $500 minimum balance to keep earning dividends.

While there is no monthly fee, there is a $5 withdrawal fee that applies to any movement of money out of the account, including transfers. To transfer funds between accounts, you can initiate either through USALLIANCE or from your external account. Transfers will take a few days to post.

USALLIANCE offers its mobile app in both the Apple Store and Google Play. It allows you to view all your activity, pay bills, deposit checks and more.

Savings Account FAQs

What is a savings account?

A savings account is a type of deposit account where you can stash money for any length of time, long or short. Banks and credit unions reward you with an attractive return on your savings balance — thanks to the magic of compound interest, your savings can grow steadily over time. Keep in mind that unlike checking accounts, savings accounts aren’t designed to handle frequent transactions. Due to the Federal Reserve’s Regulation D which mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle.

While they give customers a safe place to stash their money, savings accounts serve a different purpose for financial institutions. Banks and credit unions use their customers’ deposits to fund loans and other products. Banks charge borrowers interest on loans, which funds in part the interest you earn on your savings deposits. So when you open and fund a savings account, you’re helping your bank fund its business.

Is my money protected in a savings account?

The money you place into a savings account at a bank is generally protected by FDIC insurance, up to the legal limit. This limit applies per person, per bank, per ownership category.

For example, you would receive full FDIC coverage of a $250,000 deposit made to a savings account at ABC Bank, and you would get full FDIC insurance on $250,000 deposited in a savings account with XYZ bank.

If ABC Bank went under, you wouldn’t lose a dime of your deposit. The FDIC would either set you up with a new account at another FDIC-insured bank for the same amount as the closed account, or send you a check for the balance. However, if you had a $50,000 checking balance and a $250,000 savings account balance with ABC Bank, you would only receive $250,000 in total FDIC insurance for your accounts — with a potential loss of $50,000.

Credit unions rely on National Credit Union Administration (NCUA) insurance. The NCUA is an independent agency that maintains the National Credit Union Share Insurance Fund (NCUSIF), which funds deposit insurance payouts. All federal credit unions are insured by the NCUA. State-chartered credit unions are regulated by the state supervisory authority where the credit union’s main office is located, but they may also have NCUA insurance.

How should I use funds in my savings account ?

Money kept in a savings account is best left alone unless you absolutely need it. To maximize the return on your savings, stash most of your liquid cash flow in a savings account, and only keep the funds you need for day-to-day spending in your checking account. That allows your money to grow more efficiently — more money in a savings account means more interest earned and compounded.

Is it easy to move money in and out of a savings account?

How easy it is to move money in and out of your savings account depends on your financial institution. Typically, a transfer between deposit accounts goes through Automated Clearing House (ACH). ACH transfers should only take one to two business days to clear, often clearing immediately or within one business day. Some institutions, however, may take the full two days depending on their own rules and regulations.

Keep in mind that savings accounts have a limit of up to six certain transfers or withdrawals per month, thanks to the Federal Reserve’s Regulation D, or Reg D. This limit only applies to “convenient” transfers and withdrawals made by “preauthorized, automatic, telephonic agreement, order or instruction, or by check, debit card or similar order made by the depositor and payable to third parties.” Less convenient transactions are exempt from this regulation, including withdrawals or transfers made in person at the bank or ATM, by mail or over the phone.

Making more than six transactions per cycle will often result in an excessive transaction fee depending on the financial institution. Exceeding the limit several times can lead to the bank closing your account for good.

Do I need a savings account?

It’s safe to say that everyone should have a savings account. If your money is going to sit in a bank account, it might as well earn interest while it’s there. And if you’re going to earn interest, it’s surely best to find an account that earns the most interest possible — namely a high-yield savings account.

Even if you’re not interested in chasing the highest possible interest rate, you should still have a savings account to keep your money safe. Some people don’t trust banks and stash cash under their mattresses. But what happens if your house burns down or there’s a break-in? Stolen or lost funds are gone for good. Meanwhile, money in a savings account is kept safe by the FDIC, which even offers bank skeptics peace of mind. FDIC insurance means you’ll get your money back no matter what.

What should I consider when applying for a savings account?

If you’re not sure which account to choose, consider your savings priorities first. If you’re trying to reach a savings goal, a high-yield savings account will help you reach your goal faster than a lower-rate account.

Perhaps you want an account where you don’t have to worry about fees. There are several free savings accounts and accounts that don’t charge for excessive withdrawals that would be perfect for your needs.

Generally, though, these two features should be your top priorities when applying for a savings account. A high-yield savings account grows your money more efficiently, and not having fees taking out a chunk of those savings helps you keep it.

Is it better to have a savings account with a bank or a credit union?

If you’re looking at interest rates, there’s not much difference between the average savings accounts offered by banks and credit unions. In June 2019, the average savings account rate from brick-and-mortar banks earned just 0.28% APY, while credit unions had an average APY of 0.25%. But that doesn’t mean you won’t find competitive rates at banks or credit unions — it simply means you’ll need to shop around.

The same goes with fees. A 2018 MagnifyMoney survey of 57 rewards checking accounts from banks and credit unions indicated that credit unions tend to charge slightly higher fees than their traditional bank counterparts. However, credit unions are nonprofits, and tend to charge fairer fees than big banks do.

For many people, the choice of bank or credit union is a matter of personal preference. When you join a credit union, it means that you own a piece of the institution along with the other members. With a credit union there’s more transparency about how your deposits are being used — many people prefer to know that they are funding loans and helping other members, as opposed to paying big executive paychecks.

When it comes to physical access, banks usually have credit unions beat. Big banks have the money to spread their branches throughout the country, while credit unions tend to serve specific communities and locations. Still, credit unions very often partner with other credit unions and ATM networks to provide their members with widespread ATM access. Note that the CO-OP Financial Services credit union service organization has the second largest branch network in the United States.

Why should I open a high-yield savings account?

A high-yield savings account is an easy way to boost your savings without any extra effort on your part. Let’s say you have $5,000 in a 0.01% APY savings account, which is a typical rate from traditional, big banks. Assuming you don’t make any additional contributions, in a year, you’d earn a whopping 50 cents in interest. That’s a pretty poor rate.

Switching that $5,000 deposit over to a high-yield savings account that earns 2.00% APY would yield $100 and change in interest annually — that’s definitely a sight better than 50 cents. Additional recurring deposits, perhaps monthly, would increase your savings even more. Setting up automatic recurring deposits an easy way to turbocharge your savings.

What fees are typically associated with a savings account?

Many deposit accounts charge a monthly maintenance fee. The exact fee amount depends on the bank and specific account, but they can range anywhere between $5 to $15 a month. The good news is that there’s almost always a way to waive the fee. Typically this means maintaining a minimum monthly balance or making a certain number of transactions per month. You seldom have to worry about any monthly fees with online savings accounts.

Banks often charge for returned deposits, overdrafts, excessive transactions, expedited delivery or transfers, incoming and outgoing wire transfers, and paper statements. Avoid these things and skip the fees. If you’re worried about overdrafting your account, monitor your balance closely. There’s no need to pay $35 for overdrafting your account.

Are online savings accounts safe?

Many of the best savings accounts are available online. By operating only over the internet, banks are able to save on the cost of owning and maintaining physical branches. Banks pass those savings onto their customers in the form of the high rates you see above.

But just because they’re online doesn’t mean they’re any less secure than a well-known bricks-and-mortar bank. Reputable online banks offer FDIC insurance on your balances up to the legal limit. If you’re unsure, you can use the FDIC’s BankFind tool to double check a bank’s insurance status.

As for online security, most banks employ the same security features as the big banks, if not more. This includes network and browser encryption, firewalls, anti-virus scanning and anti-malware protection. Banks may also offer additional safety features like two-step authentication, automatic logout, fingerprint identification and proactive account monitoring. You can always check a bank’s exact safety features on its website, which applies to both online-only and brick-and-mortar banks.

Can I open more than one savings account?

You sure can. If you have a lot of cash on hand, opening multiple savings accounts can allow you to maximize your FDIC insurance. Think of the scenario mentioned above: Keep $250,000 in an ABC Bank savings account and $250,000 in an XYZ savings account. Dropping the total $500,000 in a single ABC Bank savings account would leave $250,000 uninsured.

Opening more than one savings account may also help you keep track of separate savings goals. For example, you can use one savings account to house your emergency fund which you never touch except for dire circumstances. Keeping it separate from your other accounts may make it easier for you to avoid dipping into your emergency backstop.

If you do have more than one savings account, just make sure they all earn at competitive rates.

How often do savings account rates change?

Unlike certificates of deposit, savings accounts have variable rates. This means that the bank can decrease or increase their rate at any point, often without notice. However, you can typically expect rate changes to happen on or right after the start of a month.

Deposit account rates often track the federal funds rate, which is set by the Federal Reserve. The federal funds rate establishes the rate banks and other financial institutions charge each other for lending. So when the federal funds rate is cut, banks tend to cut their own rates in response. This includes not only deposit rates, but loan rates as well. Conversely, banks boost their interest rates when the Fed raises the federal funds rate. Keep an eye on the Federal Reserve’s regular meetings to get a better sense of where the federal funds rate — and therefore your deposit rates — are headed.

Do I pay taxes on savings account interest?

If you earn $10 or more in interest in a year, then yes, your savings interest is taxable. Your bank or financial institution will send you a 1099-INT form documenting the interest you’ve earned. Using that form, you include your interest earnings with your annual tax filing. The bank will also send a copy of your 1099-INT form to the IRS.

Even if you don’t receive a 1099 from your bank, you’ll still need to report interest earned on your tax return. Plus, if you earned more than $1,500 in interest in a year, you’ll need to list out the sources of all that interest income on Schedule B of the 1040 Form.

Your earned interest is taxed according to your marginal tax bracket. If you earned $50 in interest and you’re in the 22% tax bracket, you’ll pay $12 in taxes on that interest earned.

What are the alternatives to a savings account?

Having a savings account is a crucial part of your financial life, but there are other types of deposit accounts that you can (and perhaps should) fit in.

Certificates of deposit

A certificate of deposit (CD) is a time deposit. Unlike savings accounts, which have no expiration date, CDs operate according to defined terms. Typically, CD terms range between three and 60 months, although some institutions offer terms beyond these parameters. Once you make your initial deposit, you have to wait for the term to expire — or mature — to access your funds and interest earnings.

CDs are a solid savings alternative for folks who have already maxed out their other savings accounts. They’re also good for longer-term savings goals. Opening a longer CD lets you lock in a high rate for the length of the term and not have to deal with the rate fluctuations that come with regular savings accounts.

CDs often require a minimum deposit to open, often ranging between $500 and $10,000. Any deposits larger than that are often considered “jumbo” CDs. However, there typically aren’t monthly fees to worry about with a CD.

Withdrawing money from a CD before maturity will result in an early withdrawal penalty. Remember how banks use savings accounts to fund their loans? The same is true here, except with CDs, you’re essentially making a promise to the bank that they can use those funds for a set amount of time.

For example, if you open a five-year CD, the bank expects to be able to use the funds for loans over a period of five years. If you withdraw that money after three years, the bank loses access to those assets and charge you a penalty. The penalty is often expressed as a portion of the interest earned. In this example, you might be charged 365 days’ worth of interest for making that early withdrawal. Some banks may offer “no-penalty” CDs, which tend to have shorter terms, that allow you to avoid the penalty.

Money market account

A money market account resembles a savings account more closely. It earns interest without an expiration date and limits your outgoing transactions to six per cycle. However, money market accounts can also include some checking account features like a debit card and the ability to write checks. This makes them a good alternative if you plan to dip into the account a bit more regularly, rather than using it only for emergencies.

Money market accounts tend to earn at higher interest rates than regular savings accounts. However, they also tend to require higher balances to open and then earn interest. Money markets often charge monthly fees, as well, even when they’re online.

Checking account

Checking and savings accounts are the bread and butter of your financial life. While savings accounts are meant for stashing your money away, checking accounts are designed to help you move through the world, making payments, sending transfers, getting cash and more.

That doesn’t mean that your checking account can’t earn interest, too, however. Maximize your savings by opening a high-yield checking account to match your high-yield savings account. Checking accounts don’t earn at rates as high as savings accounts, but that way, all your money in all your accounts can be growing. For more efficiency, consider keeping the majority of your funds in your savings account for better growth — then you can transfer funds over to your checking account as needed.

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Banking

What is a Cash Management Account?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Actions have consequences. Staying up too late will turn you into a zombie at work the next morning, eating ice cream for breakfast will force you to buy new jeans — and placing your money in a conventional checking or savings account could yield a piddling amount of interest.

The internet hasn’t found a way to circumvent the biological necessities of sleep and a healthy diet — yet — but it can empower banks and financial institutions to offer accounts with APYs climbing well above 2.00% in some cases, all while providing the ease-of-access and convenience of a checking account. In the evolving world of online banking, these are usually called cash management accounts, and you need to know more about them.

You may have read about cash management accounts. They go by a variety of names: hybrid checking, hybrid accounts, cash management vehicles. Like many consumer financial products, readers may be a bit unclear about how these accounts actually work — and to start, note that they are very different than the “cash management accounts” offered by certain online stock brokerages.

“We’re trying not to think like traditional bankers, with the usual boundaries of how an account should be used,” said David Hijirida, CEO of Simple, which offers its own cash management account. “What we’ve found is that most customers use our accounts in a way that combines both checking and savings behaviors.”

Let’s get to the heart of the matter by defining what these new accounts are and whether they’re right for you and your money.

What is a cash management account?

Whatever the name, a cash management account combines the high interest rates of a savings account or certificate of deposit with the accessibility of a checking account.

With some of the accounts reviewed below — like Aspiration’s Spend and Save and Simple’s Checking and Protected Goals Accounts — the product actually consists of a checking account (which typically earns little to no interest) linked with a savings account (which earns a pretty decent APY) and features instantaneous, unlimited transactions between the two. Others — like Radius’ Hybrid Checking — comprise a single checking account earning a high APY, minus all the usual requirements typical of a traditional high-yield checking account.

While cash management accounts consisting of both a checking and savings account earn some of the highest APYs, you need to watch out that you don’t keep the majority of your funds in the checking or spending portion — where it earns minimal interest. Because transferring funds between the checking and saving portions happens instantly and doesn’t come with any limits, this is an easy mistake to avoid.

The boundary between “cash management account” and “high-yield checking” account can be hazy, but they share the following characteristics that place them in the “cash management” category.

  • Zero fees: One of the more attractive facets of cash management accounts is that most have no monthly maintenance fees (or only charge a small amount). This helps differentiate them from high-yield checking accounts, many of which require users to meet multiple specific requirements each month or pay maintenance fees in order to earn the high APY.
  • A higher APY than your typical checking account: According to DepositAccounts.com (like MagnifyMoney, it too is owned by LendingTree), the average APY a checking account earns is 0.191%. Traditionally that’s been seen as the trade off depositors make with banks in order to have easy, everyday access to their funds. The cash management accounts we review here represent true hybrid accounts that combine the liquidity of checking accounts with the high interest rates of savings accounts. All of them offer a much higher APY than the average checking account and, in many cases, higher than the interest earned in many savings accounts.
  • They’re online accounts, mostly: The institutions offering cash management accounts mostly exist as ones and zeros on the web. Some of these companies, like Aspiration, aren’t even banks themselves, but have partnered with traditional banks to provide customers with their services.

How do cash management accounts earn so much interest?

While the particulars vary from account to account, the principal underlying cash management account combines a traditional checking and savings account in one instrument — you deposit money with a bank or institution, where it earns interest. The financial institution then takes a cut of that interest in order to make money, and passes the rest on to your (which is reflected in the interest that particular account earns).

Because banks prefer customers to deposit as much money as possible for an extended period, they usually give accounts and products that limit customers’ ability to withdrawal their cash higher interest rates in order to incentivize depositors into using those products.

Average Checking Account APYAverage Savings Account APYAverage 1 Year CD
APY
Average 5 Year CD
APY
0.191%0.271%1.215%1.872%

As you can see from the chart above — this data comes from DepositAccounts.com — the more liquid your account, the less interest it earns for you. Checking accounts, which provide almost unlimited access to your money, earn the lowest APY on average. Certificates of deposit with a five-year term, which usually come with a steep financial penalty if you withdraw the money before the term is up, provide the highest interest, on average.

So how do the companies offering cash management accounts bypass this norm to offer customers high interest rates on accounts with little to no restrictions on withdrawals? A big part of the answer is their low overhead, thanks to their online-only operations.

Megabanks like Chase employ thousands and maintain a sprawling network of physical locations, while an online-only institution like Aspiration, offering the Spend and Save cash management account, might have only a few dozen employees on its payroll.

“Because we’re online-only, it helps us pass on those kinds of savings to our customers,” said Andrei Cherny, CEO of Aspiration.

Where does my money go when I deposit it into a cash management account?

Since many of the institutions offering cash management accounts lack the extensive infrastructure of traditional banks, you may be wondering where your money is actually deposited with these accounts.

The answer is almost always that they partner with a bank (or a series of banks) to manage your funds. At the end of the business day, the money in your cash management account is swept into one of these participating bank’s accounts, where it enjoys the normal protections provided by FDIC accounts.

This information should all be disclosed to you when you open a cash management account, and if it’s not you should hesitate before placing a large amount of money in the account.

“As with anything, read the fine print,” said Jonathan Chapman, CFP at WJ Interests based in Sugar Land, Texas. “Look under the hood to see what banks they partner with to ensure they are working with quality institutions.”

Customers should also keep an eye on the individual FDIC-insured accounts where your money is swept at the end of the day. Make sure none of the balances exceed the insurance’s limit ($250,000) — otherwise, the portion of your balance that’s greater than $250,000 is at risk of being uninsured.

The potential pitfalls of cash management accounts

The high interest rates offered by these accounts make them attractive to customers who want their money to grow at a decent rate while still remaining accessible, but they’re not for everyone. Because most of these hybrid accounts are offered by online-only banks or institutions, customers have to feel comfortable banking with a company that may lack decades of history — especially if they’re already accustomed to doing business with another bank.

“As an advisor, my most difficult work is to get people to follow through on my recommendations,” said Jayson Owens, CFP at Bright Road Wealth Management based out of Anchorage, Alaska. “To accomplish this, I rarely recommend changes to a primary checking account. The cost in time typically outweighs the benefit of the change.”

Another related concern customers may have about these cash management accounts is if the companies offering them will stick around for the long haul. “Clients may not lose money but the company may get acquired or shuts down which would cause unnecessary hardship,” said
Deva Panambur, CFA and CFP at Sarsi, a wealth management company based in West New York, N.J.

While you’re not going to be able to waltz into the CEO’s office and demand a look at his five-year plan, you should take into account your gut reaction to how a company offering a cash management account presents itself and whether it has a viable shot at longevity.

The best cash management accounts

Account nameAPY earnedMinimum balanceMonthly Maintenance Fee
Simple Account1.90%$0.01$0
Betterment Everyday Cash Reserve and Checking*1.83% $0$0
Wealthfront Cash Account*1.78% APY on the entire balance$1$0
SoFi Money1.60% APY on the entire balance$1$0
Radius Rewards Checking Account1.20% APY on balances of $100,000 and greater; 1.00% APY on balances between $2,500 and $99,999.99$100,000 to earn the highest APY; $2,500 to earn 1.00% APY$0
Aspiration Spend and Save1.00% APY on the entire balance$1,000 monthly deposit to earn 1.00% APY or $10,000 Save account balance
$0

*These cash management accounts currently don’t have a way for you to spend money directly from the account (such as a debit card or check) and require you to transfer money from the cash account to a third-party account before spending.

Simple Account

Simple was created out of frustration with the banking industry. According to the founders, they were confounded by the complexities of certain bank accounts; their solution was to offer a no fee bank account that earns interest and helps you budget your money “in one simple app.”

What makes this bank account stand apart from other online checking accounts? Well, for starters, it’s a checking account that doesn’t have any fees, not even if you use an international ATM (however, a fee may still be charged by the ATM owner). With this cash management account, you can earn 1.90% APY on balances in your Protected Goals account that range from just $0.01 to $10,000. If you’re able to maintain a balance of over $10,000, Simple will reward you with a higher APY of 1.90%. The Protected Goals Account — basically a savings account that lives within your larger Simple account, where you can instantly transfer money in and out of as many times as you want without any penalty.

SEE DETAILS Secured

on Simple’s secure website

Betterment Everyday Cash Reserve and Checking

Betterment plans on its Everyday Cash Reserve and Checking accounts to work in tandem, but currently only the Cash Reserve is available for customers. The Cash Reserve account promises a promotional APY of 1.83%. Previously, you needed to sign up for an Everyday Checking account in order to earn the 1.83% APY, however this does not appear to be the case anymore. The Everyday Checking account is currently being rolled out on a limited basis to customers on the wait list.

Because money in the Everyday Cash Reserve account is held by several program banks, customers enjoy FDIC protection up to $1 million. There’s no limit to the amount of times you can transfer money in and out of your Cash Reserve account (unlike a traditional savings account at a bank) but it does take 1-2 business days to for Betterment to process these transfers.

SEE DETAILS Secured

on Betterment’s secure website

FDIC Insured

Wealthfront Cash Account

This robo-advisor offers savers a cash management account that earns 1.78% APY and doesn’t require you to open an investment account. Because Wealthfront sweeps the money you deposit in the cash account into several partner bank accounts, your money is FDIC insured up to $1 million, a selling point for those wanting large balances to receive the maximum protection. Currently Wealthfront doesn’t offer a debit card to allow you directly spend the money with a merchant (though the company promises its working on it), but you can transfer funds from the cash account to a third-party account or an internal Wealthfront investment account free of charge.

SEE DETAILS Secured

on Wealthfront’s secure website

FDIC Insured

SoFi Money

Though it’s probably better known for its mortgages and student loans, this online-only investment firm has staked a claim in consumer banking by offering its Money account, which offers a generous APY.

SoFi doesn’t require depositors to maintain a minimum balance in this account in order to earn that high interest rate, one of the few accounts in the market that doesn’t place a barrier between the customer and the high APY. Account holders also get additional goodies like free paper checks upon request and unlimited reimbursement of ATM fees.

SEE DETAILS Secured

on SoFi’s secure website

Radius Rewards Checking Account

Radius Bank is a community bank headquartered in Boston. The Radius Rewards Checking account is free, as long as you open the account with the required deposit of $100.

Because the Rewards account offers a much-higher than average interest rate for a checking account without saddling the customer with a laundry list of requirements — like a number of debit transactions required each month — Radius’s account joins the list of best cash management accounts.

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on Radius Bank’s secure website

Member FDIC

Aspiration Spend and Save Account

Aspiration aims to transform personal banking from a chore customers tolerate to an act of social responsibility — at least according to their marketing campaign, which heavily emphasizes the fact that customers only pay whatever they wish in fees, with 10 percent of that money going to charity. But even depositors who don’t buy into Aspiration’s brand ethos will likely find themselves intrigued by the company’s Spend and Save account, which promises a 1.00% APY on what is effectively a checking account.

Similar to Simple, Aspiration has packaged together a savings account and a checking account into a single consumer product allowing users to move their money between both portions instantly and as many times as they wish. Users should be careful not to leave the majority of their funds in the checking portion, which owns zero APY. Instead most of the money should live in the savings account, where it earns the 1.00% APY the company advertises so prominently.

You can move your money between both parts of the Spend and Save account instantly, so having most of it in the savings portion shouldn’t slow you down during a shopping spree; however, it’s important to note in case you get careless and leave a big chunk of change in the spending portion, where it earns no interest.

SEE DETAILS Secured

on Aspiration’s secure website

 

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