High-yield savings accounts are great for short-term savings, the compounding interest really helps your money add up over time. The main difference between a high-yield savings account and a traditional bank account is the difference in the annual percentage yield(AYP). Typically, high-yield savings account pay an average of 1% APY. However, the accounts can have some risks, keep reading to learn more.
Although you don’t pay tax on your initial deposit, any accrued interest is taxed as ordinary income. If you earn more than $10 from an interest-bearing account in one year, you are required to report it on your tax return. But you are not taxed on any deposits you make to your account, only on the interest earned. So, for every dollar you earn in interest, Uncle Sam takes a percentage. In most cases, the tax rate is the same as the rest of your income.
Inflation also plays a part in how much you can lose on your high-yield savings account.
Let’s say your high-yield savings account pays 2% interest on your $10,000 deposit. After one year, you will have $10,200 in your account if left untouched.
If the inflation rate is 3%, you would need to earn $300 in interest for your money to have the same buying power. As a rule, any time your high-yield savings account doesn’t grow at the same rate as inflation, you lose money.
For other risks on high-yield savings account keep reading at Fox Business.