Bank account bonuses: The good and the bad

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Switching banks can pay off.

If you choose wisely, it could make your financial life a bit more convenient, and maybe even help you save on fees. And it can also quite literally pay off with a bank account bonus.

Bank account bonuses are a promotion some banks offer to encourage you to open an account. These bonuses tend to range from around $50 to $750, depending on a number of factors, including the amount of your initial deposit.

They’re usually a good thing. But they may have some downsides associated with them too.

So it’s good to know both the good and the bad elements of these bonuses before making any moves on where you want to keep your money.

The good

1. More money in your pocket

Bank account bonuses can be a great way to earn money in a low-yield environment. More than a year ago, top-yielding savings accounts were earning around 2.5 percent annual percentage yield (APY). Now, the highest-yielding savings accounts are offering less than 1 percent APY.
Opening a new account and earning a bank account bonus could help make up for the low-rate environment.

2. An incentive to bank elsewhere

Sometimes you don’t know how much better a product or customer experience is until you try it. Getting the chance to try a new bank, and get paid to do it, could be a win-win situation. You might find its app to be more useful, its ATMs to be more convenient or its features to be better than your existing bank.

A little more than a quarter of American adults kept a checking account for more than 20 years, according to a 2017 survey conducted for Bankrate and Money. Think about how much things can change during a 20-year span. Mobile apps weren’t around in their current form, your original bank might have been merged into another, online banking wasn’t as sophisticated and customers made transactions without the benefit of mobile deposits.

3. A way to make up for low rates

It might not be accurate to compare interest earned in a year through compounding to receiving a bank account bonus as a lump sum earned in the near future. But the bottom line is a bank account bonus is more money in your pocket. In a rate environment where the Federal Reserve has committed to low rates for the next few years, finding new ways to earn some extra cash is always welcome.

4. Consolidating to a new bank could reduce or eliminate fees

Those incurring overdraft fees and monthly service fees could benefit by having fewer accounts. Assuming you’ll have a large enough balance to avoid fees, since your money won’t be spread around different banks, you could use a bank account bonus to start banking elsewhere. It’s always a good idea to not immediately close a bank account where you have a direct deposit or bills being paid out of, until you have a chance to change over that information and the banks have a chance to process the change.

5. A bank account bonus is usually fixed

Generally, following the rules and guidelines and keeping your account open for a certain period of time will help you earn the bonus for opening your account. Other than an introductory APY or a promotional rate, savings yields are usually variable. Banks may have wording that the offer is subject to change. But banks usually pay the amount in the offer if all of the criteria have been met.

The bad

1. Tax consequences

In most cases, people should expect to get a 1099-INT issued to them for the bank account bonus, says Rachel Ivanovich, an enrolled agent at Easy Life Management in Carlsbad, California. This means the bonus is added to your taxable income, and taxed as ordinary income.

“If [the bonus is] over $10, then they most likely get a 1099-INT,” says Ivanovich.

It might show up on a 1099-MISC, Ivanovich says.

Some people in higher tax brackets may also have to pay a Net Investment Income tax on their bank account bonus, Ivanovich says.

2. The stipulations

Not knowing the terms of the offer, and failing to follow them, could stop you from receiving your bank account bonus.

“It’s imperative to make sure that anyone considering an account bonus understands the boxes they need to check in order to receive that bonus,” says Andy Mardock, certified financial planner, founder and president at ViviFi Planning in Bend, Oregon. “That is crucial.”

Common stipulations are:

  • Keeping an account open for a certain period.
  • Receiving a minimum direct deposit.
  • Never having an account at a bank. Or not having an account at a bank for a certain period.
  • A new money requirement — meaning money deposited into the account needs to come from outside of the bank.

3. You might not want to switch banks

Changing every bill payment to your new bank might not be something you want to do. Not strategizing how you change your direct deposit — by closing your old account too early — may also result in a delay of getting your money.

Convenience is the top thing that Mardock says his clients value in a bank.

“And then I find that interest rates are, or bonuses in this case, are a secondary consideration to that,” Mardock says.

4. You might want to limit the number of accounts you have

Bank account bonuses can be a great way to earn some additional money. But each account you add comes with more responsibilities. It’s important to regularly monitor your accounts. The more accounts you have, the harder it is to keep track of them all.

5. Watch the yield after the bonus

Bank account bonuses are exciting to earn. But once the bonus is deposited into your account, you need to focus on what your money is earning. The national average savings yield is 0.09 percent APY. It’s still possible to earn around seven times that by having money in a high-yield savings account. Compare rates on Bankrate to find the right account for you.

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