High Yield Savings Accounts

Alright so we have already discussed a few ways that you can start to put money aside for your child’s education through a 529 plan and how your working aged children can start to put money aside for their retirement, but what about everyday saving? Although it is definitely fun to provide your kiddo with their first little piggy bank that they can proudly display in their bedroom, you want your child’s money to work for them as much as possible while they are young so that by the time they reach adulthood, they have the means to take care of themselves. 

With a 529 and an IRA, the funds are restricted for use by either certain qualifying expenditures or by age. A high yield savings account is essentially your child’s piggy bank where the money that is sitting in that account can be used at any time for any reason and there are no penalties from withdrawing those funds for purchases. Let’s say your child has a friend at school that just bought a really cool bike. Your kid already has a bike and you as a parent are not inclined to buy them a new, more expensive bike just because they want it. However, you know that your child has received birthday money over the past several years from relatives and the funds have been sitting in a high yield savings account for that time and earning a 4% interest rate. Because this account is not restricted, you as a parent can use this as an opportunity for teaching your child about the value of a dollar and explain to them how he or she can use the money from their own personal savings to purchase the bike of their choice. Yes, you could still achieve this by setting up a checking account or a general savings account for your child, but with a high yield savings, the guaranteed higher interest earned on the account is definitely the better option. 

FAQ #1: What is the difference between a high yield savings account and a regular savings account? 

The interest rate is the largest difference. Many high-yield savings accounts are offered by online banks. Because they don't have the overhead of maintaining large branch networks, they can pass some of those savings on to customers in the form of higher interest rates earned on account balances. 

FAQ #2: Do you owe taxes on the interest earned on a high yield savings account? 

Yes - this is taxable income to your child and will require that you report it as such on your tax return at the end of the year. 

FAQ #3: What is the benefit of a high yield savings account vs. a brokerage account for holding my child’s savings? 

A brokerage account is also a great option for you to set up on behalf of your child, which we can dive into more in another post, but of course with any kind of investment, there is always risk in the stock market. Putting all of your child’s savings into a brokerage account does not guarantee that the value of the funds will hold. In some years, that money could be worth more and in others, stock market crashes definitely could make it worth a lot less. Picking individual stocks can also be risky, and so with a high yield savings, you know that your money is always going to be there, will be insured up to the federally insured limit of $250K, and will still be earning a little something extra on top. 

Setting up a high yield savings account for your child also is a great way to instill in them the importance of having an emergency fund. That he or she should always have money that is readily accessible, highly liquid and able for immediate use if needed to cover expenses in times of financial distress in their adulthood. 

FAQ #4: Are there any cons of having a high yield savings account? 

A high-yield savings account may have a few tradeoffs:

• Many are online-only, so there may not be physical branches.

• Interest rates are variable and can go up or down as market rates change.

• Some banks have limits on certain types of withdrawals or transfers, although federal limits on savings withdrawals have largely been removed.

  
  

FAQ #5: What are some of the best banks right now for opening a high yield savings account? 

I personally have my high yield savings accounts open with Capital One and PNC and have been happy with both of these providers. However, there are many options out there that are offering rates between 3.5 and 4.3%.

Nerd wallet did a great article on this recently where they compared options: https://www.nerdwallet.com/banking/m/standout-high-yield-savings-products?utm_source=goog&utm_medium=cpc&utm_campaign=bk_mktg_paid_savings_best_hysa&utm_content=ta&mktg_place=kwd-127451844&gad_source=1&gad_campaignid=22795601037&gbraid=0AAAABAYzWJOEB_uKvp-KE8UBceDaf1ufo&gclid=CjwKCAjwpqHTBhAcEiwAj2AfunwglGlnjj_ksYJx-ZnVkvRjBozwEjptEEp8SJtjtOg0rTY9ZZEWmhoCU3oQAvD_BwE