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

High-yield savings accounts (HYSAs) offer higher annual percentage yields (APYs) than traditional savings accounts, often by operating online to reduce overhead costs. A common question is whether it is possible to lose money in these accounts. While the principal is largely protected against institutional failure, other factors can influence the real value and net returns.

The Role of Deposit Insurance

The principal amount in a high-yield savings account is protected by federal deposit insurance, mitigating the risk of losing funds due to bank failure. For banks, this protection is provided by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each ownership category. This means if a bank fails, the FDIC will ensure depositors recover their insured funds.

Credit unions are insured by the National Credit Union Administration (NCUA) through its National Credit Union Share Insurance Fund (NCUSIF). The NCUA offers the same coverage limits as the FDIC: up to $250,000 per depositor, per insured credit union, for each ownership category. Both the FDIC and NCUA automatically provide this coverage.

The $250,000 coverage limit applies to various ownership categories, such as single accounts, joint accounts, and certain retirement accounts like IRAs. This allows individuals to potentially increase their insured amounts at a single institution by using different ownership types.

The Impact of Inflation on Savings

While deposit insurance protects the numerical balance, the purchasing power of money in a high-yield savings account can diminish due to inflation. Inflation is the rate at which prices for goods and services increase, leading to a decrease in the purchasing power of currency. This means the same amount of money will buy fewer goods and services over time.

Even if a high-yield savings account earns interest, the real value of the savings can erode if the inflation rate exceeds the interest rate earned. For instance, if an account yields 1% interest but inflation is 3%, the real return on savings is a negative 2%. In such a scenario, while the nominal balance in the account increases, the money’s ability to purchase goods and services declines.

This reduction in purchasing power is a way money can “lose value” in a savings account, even without a decrease in the principal balance. Savers must consider the real interest rate (nominal interest rate minus the inflation rate) to understand the true growth or decline of their money’s buying power. High-yield accounts must offer rates competitive with or exceeding inflation to preserve or increase the real value of deposits.

Factors Affecting Net Returns

Beyond inflation, several other factors can influence the net returns on a high-yield savings account, affecting the overall financial benefit rather than a direct loss of the initial deposit. Account fees, though less common with online HYSAs, can reduce earnings. Some institutions might impose monthly maintenance fees, excessive transaction fees, or other service charges. While many HYSAs are advertised as having no monthly fees or minimums, it is prudent to review the fee schedule to understand any potential charges that could erode interest gains.

Fluctuating interest rates also affect the growth of savings in HYSAs. Unlike certificates of deposit (CDs) that offer fixed rates for a set term, high-yield savings accounts typically have variable interest rates. These rates can change based on market conditions and the financial institution’s policies. A decrease in the prevailing interest rates means that less interest will be earned on the savings, slowing the overall growth of the account balance.

Additionally, interest earned from a high-yield savings account is considered taxable income by the Internal Revenue Service (IRS). This interest is taxed at ordinary income tax rates, similar to wages or salaries. Financial institutions issue a Form 1099-INT to account holders who earn at least $10 in interest during a calendar year, although all interest earned, regardless of amount, must be reported. The tax liability on interest income reduces the net return on savings, making the effective yield lower than the advertised APY.