The Downside of Traditional Savings Accounts -- and Better Alternatives for 2024
KEY POINTS
- While savings accounts give you flexibility, they have their drawbacks.
- Your interest rate isn't set in stone, and the interest you earn could result in a large tax bill.
- A CD guarantees you a preset interest rate, and a Roth IRA lets you avoid taxes on gains.
There's a benefit to putting money into a savings account. Savings accounts are very flexible, allowing you to access your funds whenever you need to. Also, your principal deposits are protected as long as they don't exceed $250,000 and your bank is FDIC insured. For a joint account, this limit rises to $500,000.
But savings accounts also aren't perfect, and there are a couple of drawbacks to using one. Here are some pitfalls you might encounter with a savings account -- and how to get around them.
Downside No. 1: Your interest rate isn't set in stone
You might put money into a savings account at a time when its APY is 4.00%. But in four months from now, your account's APY could fall to 3.50%, which means you're then earning less interest on your money.
Solution: Open a CD instead
CD rates are set in stone. When you open a CD, you're guaranteed the interest rate you sign up at for the duration of your CD's term.
Our Picks for the Best High-Yield Savings Accounts of 2024
SoFi Checking and Savings
APY
up to 4.60%
Rate info
You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.
Min. to earn
$0
|
APY
up to 4.60%
Rate info
You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.
|
Min. to earn
$0
|
Synchrony Bank High Yield Savings
APY
4.75%
Rate info
Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC
Min. to earn
$0
|
APY
4.75%
Rate info
Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC
|
Min. to earn
$0
|
Capital One 360 Performance Savings
APY
4.25%
Rate info
See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.
Min. to earn
$0
|
APY
4.25%
Rate info
See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.
|
Min. to earn
$0
|
The Federal Reserve is expected to cut interest rates at some point in 2024. Once that happens, the APY on your savings account is likely to drop. You can avoid losing out on interest income by putting your money into a CD. You may, in fact, want to lock in a longer-term CD -- say, one with a term of 48 or 60 months -- in anticipation of rates falling over the next few years, which may happen given how elevated they are today.
Downside No. 2: Your interest income will result in a tax bill
The interest income you earn in a savings account is taxed as ordinary income, which means it's taxed at the highest rate you're subject to based on your marginal tax bracket. If you earn a lot of interest in a savings account this year, you may end up with a smaller tax refund in 2025. You might even have to write the IRS a check.
Solution: Put money into a Roth IRA and invest it
If you're saving your money for retirement purposes, opening a Roth IRA is a great way to get out of paying taxes on your gains related to that money -- in the near term and the long term. Roth IRAs allow you to invest your money in a tax-free manner. You can contribute up to $7,000 this year if you're under 50, or $8,000 if you're 50 or older. Roth IRAs have a variety of investment options, including CDs and bonds.
Let's say you put $5,000 into a Roth IRA this year and it eventually becomes worth $20,000 over time. You won't have to pay taxes on that $15,000 gain -- ever.
Savings accounts are convenient. And they're the absolute best place for your emergency fund. But if you prefer a savings option with a guaranteed interest rate, a CD could be a better bet. And if you don't like the idea of having to share your profits with the IRS, then you may want to look at a Roth IRA instead.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Related Articles
View All Articles