What Is a Tiered Savings Account?

What Are Tiered Savings Accounts?

Tiered savings accounts offer multiple annual percentage yield (APY) levels, and earnings get higher the larger your balance increases. A bank account's APY is how much interest you earn on an annualized basis, and nabbing a high APY on a large sum can help you earn a greater return on the money you put away.

APYs on tiered savings accounts can vary widely depending on the bank or credit union providing the account. For example, starting rates for balances up to $100,000 could range from 0.25% to 1.5%. For balances between $100,000 to $1 million you could earn up to 2% APY or even more in some cases.

Here's a sample breakdown of how a tiered savings account could work:

How Can a Tiered Savings Account Help You Save?

Using a tiered savings account can help grow your money while keeping it liquid and easily accessible. Let's say you're saving to buy a rental property in the next two years, and you want to keep down payment funds out of the stock market to avoid risk.

Putting money into a tiered savings account is a low-risk way to have your money work harder for you in a safe place. That's because, with savings accounts backed by National Credit Union Administration (NCUA) or Federal Deposit Insurance Corporation (FDIC) insurance, the first $250,000 you have saved per person per account ownership category is guaranteed by the government. With an investment account, your money isn't protected from day-to-day market fluctuations, so you could lose money.

Tiered savings accounts can also be good places to stash emergency savings because cash is easily accessible if you need it, but not in your regular everyday savings account. You could get a debit card to withdraw money from an ATM, or you could easily do a cash transfer if a surprise bill comes up and you need money.

So, why do banks offer higher APYs the more money you save? Financial institutions make money by using depositor cash to fund loans and charge interest to other customers. Since maintaining a high balance provides banks with extra cash to operate their business, you may be rewarded with a higher return on the money you have saved.

Here's a rundown of the pros and cons of tiered savings accounts:

Pros of Tiered Savings Accounts

• Your money is liquid and easily accessible if you need it.
• A high APY can help grow your balance, even if you don't make regular deposits.
• Government deposit insurance protects your deposits up to a limit.

Cons of Tiered Savings Accounts

• APYs are typically variable and can change without notice.
• You may need to have a sizable savings balance to earn the top rates.
• Accounts may have a minimum deposit required to open, like $5,000 or $10,000.
• You may need to meet other conditions to earn the high APY, like maintaining a certain balance.

Should You Use a Tiered Savings Account?

If you already have a high savings balance, moving to a higher-yield tiered bank account might be the obvious choice since it could earn you more interest.

However, consider your financial goals and what you're saving for when deciding where to put your cash. While savings accounts are low risk, they might also offer a lower return than investing in the stock market for long-term goals, like saving for retirement. If you're saving for a goal that's, say, 10, 20 or 30 years out, exploring investment options for at least part of your cash could help your money earn a higher return over time.

On the other hand, if you have a low savings account balance, you may not meet the minimum balance requirement for a tiered savings account. And with a low balance, you might not earn enough in the lower tiers to make moving accounts worthwhile.

It's when you get to balances of $25,000, $100,000 or more that you could see a real boost to your APY and returns. Here's an example of the impact having a large balance and a high APY could have on your annual earnings.

Tiered savings accounts aren't the only way to secure a high APY on your savings. Alternatives that could also offer a high APY are high-yield savings accounts and certificates of deposits (CDs).

• High-yield savings accounts: Like tiered savings accounts, high-yield savings accounts may offer a higher APY than a traditional savings account. However, a high-yield savings account may offer the same APY regardless of how much you keep in the account. Some high-yield savings accounts currently offer APYs of 3.30% or higher. However, you might need to meet conditions to earn that rate, such as having a direct deposit set up to fund the account monthly.
• CDs: With a CD, your cash is typically parked for a term that could range from a few months to a few years. Interest rates are fixed and can be higher than a savings account because you're promising to keep money in the account for a term. But because you may be charged a fee for early withdrawals, you should only use CDs for money you don't need to access regularly.

The Bottom Line

For savers with large balances, tiered savings accounts can help you earn a bit more money while your money is sitting. But high-yield savings accounts and CDs might offer returns comparable to tiered accounts, regardless of your balance size, and are another option to consider. Shopping around to compare APYs, deposit requirements, account capabilities and fees can help you find the best savings account for your needs and goals.