A tax refund can give your savings a one-time boost.
Outside of a bonus or other windfall, most people don’t see a lump sum of money near the value of a tax refund during the year. And a new savings account can be the perfect way to separate this money from other funds. This is a great strategy if you are in a low annual-percentage yield (APY) account or don’t have a high-yield savings account.
“It’s not just tossing it into your regular checking account where you pay bills and it gets lost in the shuffle,” says Missie Beach, certified financial planner at Redwood Wealth Management, LLC in Alpharetta, Georgia. “And it’s not just your regular savings account that you have in place where your savings for vacation or the unexpected car repair. I kind of like the idea of setting up this brand-new savings account, that shiny and new and really not earmarked for anything yet (account).”
Investing your tax refund in a new high-yield savings account can jumpstart your savings plan or help you to turn over a new leaf when it comes to saving. In 2019, it’s easy to get a savings account yielding at least 2 percent APY with a low or minimal minimum balance. “If you started in a new account, I think it’s easier for a client to look at that new account as something that they might not touch,” Beach says.
Now’s the time to save
After years of low-yielding rates, savings accounts are at APYs we haven’t seen in years. While it’s possible that you’re in a high-yielding account, compare it to one of the online bank offerings below to confirm. Since the average tax refund as of March 1 is $3,068, here are some savings accounts that have a minimum balance requirement lower than that.
- United Bank: 2.50% APY – The minimum to earn this APY is $1. The account has functionality that a lot of other money market accounts don’t have. It has both a debit card and check-writing privileges. But you will be restricted by Regulation D guidelines. It’s important to note that it does have a $10 fee if you close out the account in the first three months and if your daily balance during a monthly statement cycle drops below $2,500, you’ll incur a $15 monthly service charge. This account is offered in 26 states. Though, if you think accessibility is a negative feature – since it may mean you’ll withdraw the funds earmarked for savings – then you might want to look at an account that doesn’t have these features.
- Western State Bank: 2.50% APY – The High Yield Money Market has no minimum balance and interest is earned on any balance. There is no ATM card, debit card or checks for this account.
- CIBC Bank USA: 2.39% APY – The minimum balance to get the 2.39 percent APY is just $0.01. If your savings is going to truly accumulate, then this might be the right account for you.
- Synchrony: 2.25% APY – This APY combined with no minimum balance is a great combination. Synchrony has consistently been a bank to offer competitive yields. And its savings account also has ATM access.
- Marcus by Goldman Sachs: 2.25% APY – You only need $1 to earn the top APY at this bank, which has also been keeping up with rate increases.
Choosing a new savings account
There are three areas that you need to consider when comparing savings accounts.
- The APY: You want to be in the highest APY account possible because you want to earn the most interest. Generally, savings and money market account APYs are variable. However, if your bank ever stops being competitive, you can always switch to a different bank.
- The minimum balance: Make sure the minimum balance fits with the amount you’re planning to keep in the savings account. If it doesn’t, you may incur maintenance fees which may negate any interest that you’ll earn, or you could lose that high APY.
- Accessibility: Look at how you’ll be able to access this money and whether that method works for your individual circumstances. Though if this is truly a savings account that’s going to accumulate, accessibility with an ATM card or check-writing privileges may not be necessary – as long as you’re able to access this money by transferring it electronically via an Automated Clearing House (ACH) transfer. Sometimes making your money a little hard to get to – and not an ATM-machine visit away from a withdrawal – can help those who have the urge to withdraw from savings. “So, there’s kind of some barriers in place to getting access to that money,” Beach says. “And that’s kind of what you want to do if your goal truly is savings.”
A new saving account doesn’t mean ending your brick-and-mortar relationship
In some circumstances, a brick-and-mortar bank or two can be a great place to have a checking account or a small savings account that’s easily accessible.
“You can still link it to your brick-and-mortar bank if you still want to bank that traditional route,” Beach says. “But I think just the whole online methodology with savings makes it a little bit harder for a client to just be trigger-happy and say, ‘You know I think I’m gonna pull that out and use it for X, Y, Z.’ It’s just got that little bit of a barrier there between spending it and saving it.”
A new online savings account at a Federal Deposit Insurance Corp. (FDIC) bank or at a National Credit Union Administration (NCUA) can be a great addition to your financial plan. A savings account at an insured institution – and within the insurance guidelines – may be a great option for the bulk of your savings since many of the APYs may be more than 20 times the Bankrate savings account national average of 0.10 percent APY. Or they may be more than nine times the Bankrate money market account national average of 0.21 percent APY.
FDIC deposit insurance covers depositors dollar-for-dollar through the date of default up to at least $250,000 at an FDIC-insured bank, according to the FDIC. At an NCUA credit union, the standard share insurance amount is $250,000. This protection through the National Credit Union Share Insurance Fund (NCUSIF), administered by the NCUA, insures individual accounts up to $250,000 and a member’s interest in all joint accounts combined up to $250,000, according to the NCUA. The NCUA standard share insurance is per share owner, per insured credit union, for each ownership category, according to the NCUA. Always confirm with your bank that your account is within insurance guidelines.