Direct Answer
A high-yield savings account (HYSA) is an FDIC-insured deposit account at a bank or credit union that pays significantly above-average interest, typically tied to the federal funds rate. There are no contribution limits, no penalty for withdrawals, and interest is taxed as ordinary income. FDIC insurance covers $250,000 per depositor per institution per ownership category.
High-Yield Savings Account (HYSA) Profile: Rates, FDIC and Rules
What is a High-Yield Savings Account?
A high-yield savings account (HYSA) is a federally insured deposit account that offers an annual percentage yield (APY) materially above the national average for savings accounts. HYSAs are most commonly offered by online banks (which have lower overhead than traditional brick-and-mortar banks) and some credit unions, though traditional banks and credit unions also offer HYSAs.
There are no annual contribution limits. Depositors can add or withdraw funds freely, subject to each bank's policies. The APY floats and typically tracks the federal funds rate: when the Fed raises rates, HYSA APYs tend to rise; when the Fed cuts, APYs fall. The FDIC does not set or guarantee a minimum rate.
HYSAs do not provide checks, debit cards, or ATM cards (by definition a savings, not a transaction account), though many offer electronic transfers to and from a linked checking account. Some banks impose transaction limits per statement cycle, though the Federal Reserve eliminated Regulation D's 6-transaction-per-cycle limit in 2020; individual banks may still apply their own limits.
FDIC and NCUA Insurance
| Ownership Category | Coverage Limit per Institution |
|---|---|
| Single / individual accounts | $250,000 |
| Joint accounts (per co-owner) | $250,000 |
| Retirement accounts (IRAs) | $250,000 (separate from other categories) |
FDIC insurance applies to FDIC-member banks; NCUA insurance applies to federally insured credit unions at the same limits. Coverage is per depositor, per institution, per ownership category. Deposits above the limit are uninsured. FDIC does NOT cover investment accounts (stocks, bonds, mutual funds, crypto) even at an FDIC-insured bank.
Tax Treatment
Interest credited to an HYSA is taxed as ordinary income at the federal level in the year it is credited, whether or not withdrawn. Banks and credit unions issue Form 1099-INT for $10 or more in annual interest. State tax treatment:
- Most states tax savings interest as ordinary income at the applicable state rate.
- A few states (Florida, Texas, Washington, etc.) have no income tax and therefore no state tax on interest.
- Unlike U.S. Treasury interest, HYSA interest is not exempt from state and local income tax.
This state tax difference matters when comparing HYSA yields to Treasury bill yields: if you're in a high-tax state (e.g., California, New York), the after-state-tax yield on Treasuries may exceed the after-state-tax yield on an HYSA with a nominally identical rate.
HYSA vs. Money Market Account vs. T-Bills
| Feature | HYSA | Money Market Account | Treasury Bills |
|---|---|---|---|
| FDIC / NCUA insured | Yes | Yes (at banks/CUs) | No (U.S. govt. obligation) |
| Rate structure | Variable APY | Variable APY (tiered) | Fixed at auction; 4w to 52w |
| State income tax on interest | Yes | Yes | No |
| Minimum balance | Varies (often $0) | Often $1,000-$10,000 | $100 (TreasuryDirect) |
| Liquidity | Immediate | Immediate | Holds to maturity or secondary market |
Frequently Asked Questions
- How is high-yield savings account interest taxed?
- HYSA interest is taxed as ordinary income at the federal level in the year credited. Banks issue Form 1099-INT for $10+ annual interest. State tax treatment varies but most states tax HYSA interest as ordinary income. Unlike U.S. Treasury interest, HYSA interest is not exempt from state and local income tax.
- How much does FDIC insurance cover in a high-yield savings account?
- FDIC insurance covers deposits up to $250,000 per depositor, per FDIC-insured institution, per ownership category. Joint accounts provide $250,000 per co-owner (a two-owner joint account has $500,000 total). Retirement accounts at the same institution are insured separately up to $250,000. Credit unions use NCUA at the same limits.
- How does a high-yield savings account compare to a money market account or T-bills?
- HYSAs and MMAs are both FDIC-insured, variable-rate deposit accounts; MMAs often offer check-writing and debit access. T-bills are U.S. government obligations (not FDIC insured) with fixed yields at auction. Treasury interest is exempt from state and local income tax, which can make Treasuries more attractive than nominally similar HYSA rates in high-tax states.