What’s the Difference Between a High-Yield Savings Account and a CD?

What Is a High-Yield Savings Account?

High-yield savings accounts typically offer higher annual percentage yields (APYs) than traditional savings accounts, which only earn around 0.40%, according to the FDIC. Right now, it isn’t uncommon to see rates on high-yield savings accounts over 4.5%. That allows your money to work harder for you—especially if you’re growing a large balance, like building your emergency fund.

Money in a high-yield savings account is relatively easy to access, so liquidity usually isn’t an issue. You can typically link it to your checking account to transfer funds as needed. You can also set up automatic bill payments for certain expenses. That can come in handy if you’re using a high-yield savings account for recurring expenses like insurance premiums or school tuition.

It’s worth mentioning that some financial institutions put a cap on how many withdrawals and transfers you can make each month. That can include electronic transfers, though ATM withdrawals are typically excluded. Every bank and credit union is different, but some may limit you to six convenient withdrawals per month.

Taxes and Fees

Interest earned in a savings account is generally considered taxable income. That means you’ll have to report it on your tax return. If you earned at least $10 in interest yields, you should receive form 1099-INT.

Minimum balance requirements and monthly fees aren’t the norm with high-yield savings accounts, but some financial institutions may require them. There may also be overdraft penalties or fees for returned deposits or if you make too many convenient withdrawals in a given month.

Pros and Cons of High-Yield Savings Accounts

Pros

• Higher-than-average interest rates: This can help you grow your wealth faster.
• Liquidity: If you need to tap money in a high-yield savings account, you can generally do so without penalty (unless you’ve exceeded your bank’s monthly withdrawal limit).
• A safe place to keep your money: Most high-yield savings accounts are FDIC-insured for up to $250,000 per depositor, at each insured bank.

Cons

• Convenient withdrawals may be limited: That includes electronic transfers, though ATM withdrawals are usually unlimited.
• Some financial institutions charge fees: You might encounter monthly fees or penalties if your balance dips below a certain amount. Overdraft fees and returned deposit fees may apply as well.

What Is a CD?

A CD is designed for money you won’t need to access right away. A high-yield CD is one that earns a higher APY than most. But with all CDs, your funds are locked up in the account for a predetermined amount of time. Withdrawing money before that time is up usually triggers a fee that can cut into or completely wipe out your interest yield, depending on when you withdraw.

The penalty varies from bank to bank, so be sure to read the fine print. Some may charge as much as 12 months’ worth of interest. Certain strategies can help folks get around those liquidity issues. A CD barbell is when you split your money between two different CDs—one with a longer term and the other with a shorter term. The shorter one will give you access to your funds sooner. CD laddering is when you stagger your money across multiple CDs of varying terms. That way money is freed up on a regular basis.

CD terms generally range anywhere from one month to five years—and interest rates can be much higher than with a regular savings account. Longer terms usually translate to higher APYs. At the time of this writing, some CDs have rates over 5%.

Taxes and Fees

Just like a high-yield savings account, interest from a CD is considered taxable income. Beyond that, some financial institutions may require a minimum balance to get the advertised interest rate.

Pros and Cons of CDs

Pros

• Competitive interest rates: Some CDs offer much more than the national average for savings accounts, which can add up fast if you have a large balance.
• Guaranteed returns: As long as you leave your money alone, your returns are guaranteed. That can help you financially plan for the future. CDs are also FDIC-insured like other savings accounts.

Cons

• Liquidity is usually an issue: You’ll likely be penalized for pulling your money out before the maturity date.
• Returns lag behind the stock market: CD rates can be appealing, but you could earn more elsewhere. The average annualized return for the stock market has been around 10% for the last century.

Should You Use a High-Yield Savings Account or a CD?

Both offer higher-than-average interest rates and are considered safe places to keep your money. If you’re looking for easy access to your funds, a high-yield savings account might be a good fit. That makes it an ideal place to keep your emergency fund.

Meanwhile, a CD can be ideal for money you don’t plan on using right away. It can sit there and earn interest while your emergency fund grows elsewhere. It isn’t uncommon to keep some money in a CD and some in a high-yield savings account.

The Bottom Line

There are lots of ways to grow your wealth and safeguard your savings. High-yield savings accounts and CDs are two different approaches that serve the same purpose—strengthening your financial health over the long term. It aligns well with maintaining strong credit. Experian can help with that, allowing you to check your credit score and credit report for free whenever you need it.