Can You Lose Money in a High-Yield Savings Account?

High-yield savings accounts (HYSAs) offer an attractive option for individuals seeking to grow their savings beyond traditional bank accounts. While HYSAs are generally considered a secure place to keep funds, understanding how money can diminish in value is important. This article explores the different aspects of money preservation and erosion within the context of a high-yield savings account.

Understanding Principal Protection

A primary concern for any saver is the safety of their initial deposit, known as the principal. High-yield savings accounts offered by reputable financial institutions provide a robust layer of protection for these funds.

The Federal Deposit Insurance Corporation (FDIC) protects depositors in the event of an insured bank failure. Each depositor is insured up to $250,000 per insured bank, for each account ownership category. If an FDIC-insured bank were to fail, your savings, up to the specified limit, would be returned to you by the FDIC.

This protection fundamentally distinguishes HYSAs from investment vehicles such as stocks, bonds, or mutual funds. Investments inherently carry market risk, meaning their value can fluctuate, potentially leading to a loss of the original principal. In contrast, HYSAs are designed for safety and liquidity, focusing on preserving your capital while providing a modest return.

How Purchasing Power Can Diminish

While the nominal amount of money in a high-yield savings account is generally protected, its real value, or purchasing power, can diminish over time due to several factors. Inflation represents a general increase in prices and a fall in the purchasing value of money. If the annual interest rate earned on a HYSA is lower than the rate of inflation, the money saved will buy less in the future. For example, if inflation is 3% and your HYSA earns 2%, your money’s buying power effectively decreases by 1%.

Interest earned on HYSA balances is considered taxable income by the Internal Revenue Service (IRS). This income is subject to federal income tax, and potentially state and local income taxes, depending on where you reside. The tax rate applied to this interest income depends on your overall tax bracket. For instance, if you earn $100 in interest and are in a 22% federal tax bracket, you would owe $22 in federal taxes, reducing your net gain. This tax obligation reduces the effective return on your savings.

Although less common for high-yield savings accounts, certain fees could potentially erode your earnings or even a small portion of your principal. Some banks might impose monthly maintenance fees if a minimum balance requirement is not met, or charge excessive transaction fees for certain activities. It is important to review a bank’s full fee schedule before opening an account. Understanding these potential charges helps ensure that the interest earned genuinely contributes to your savings growth.

Choosing a Reliable High-Yield Savings Account

Selecting a reliable high-yield savings account involves careful consideration to ensure both the safety and the effective growth of your funds. First, confirm the financial institution offering the HYSA is insured by the Federal Deposit Insurance Corporation. This provides principal protection, safeguarding deposits up to the federal limit. Most banks display their FDIC insurance status.

Comparing current interest rates is another step. Rates vary significantly, and a competitive rate helps offset inflation. While higher rates are desirable, consider them with the bank’s FDIC status and reputation. Regularly check market rates to ensure your account remains competitive.

Review the account’s fee schedule. Identify potential charges like monthly service fees or withdrawal fees that could diminish earnings. Understanding terms and conditions, including minimum balance requirements or transaction limits, ensures the account aligns with your financial habits. Consider the bank’s customer service reputation, as responsive support helps with account issues.

Citations

https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/
https://www.fdic.gov/resources/deposit-insurance/faq/index.html