“Understanding Tiered Savings Accounts: Benefits and Pitfalls”

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How Tiered Savings Accounts Work

With a tiered savings account, your interest rate increases as your balance grows. This can help your money grow faster, especially if you have a substantial amount saved. These accounts are ideal for emergency funds or saving for significant financial goals, but interest rates can vary between financial institutions. Understanding how they work can help you maximize your savings and avoid potential pitfalls.

How Tiered Savings Accounts Work

A tiered savings account increases its annual percentage yield (APY) as the balance grows. The more money you have in the account, the more interest you’ll earn. This structure is common among savings accounts and some money market accounts. With a regular savings account, you’ll get the same interest rate regardless of your balance.

Tiered-rate savings accounts are available from traditional banks, online banks, and credit unions. The competitive APYs they offer can motivate customers to keep more in their accounts. For example, TD Bank’s Signature Savings account offers an APY of just 0.01%. But that rate jumps to 2% if your balance hits $10,000—and continues increasing incrementally if you deposit more. Balances of $100,000 or more will earn 4% if you link an eligible account.

How to Maximize Your Savings Using a Tiered Savings Account

1. Align Your Account With Your Short- and Long-Term Financial Goals

Begin by reviewing your savings goals, which may include:

• Building your emergency fund
• Paying down debt
• Saving for retirement
• Putting money away for your kids’ education
• Starting a business
• Buying a home

Thanks to its liquidity, a tiered savings account can be a great home for your emergency fund. If you run into a financial surprise, you’ll have easy access to your cash.

It can also be a good holding place for money you plan on using in the near future. For instance, if you’re aiming to launch a new business within the next two years, holding your startup cash in a tiered savings account will protect it from market volatility and potential losses. Additionally, virtually all savings accounts are insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA), covering up to $250,000 per person per account category and per financial institution.

A tiered savings account isn’t ideal for long-term financial goals, however. Over the last century, the stock market has had average annual returns of around 10%. If you’re saving for a far-off goal, like retirement, you’ll probably want to keep some of your money invested. Retirement accounts also offer attractive tax perks.

2. Take Interest Rates Into Account

Tiered savings accounts usually have variable APYs. That means rates can drop without warning, which could affect your earnings. It’s also wise to look at yields on other low-risk investments. Rates on high-yield savings accounts aren’t tiered, but some offer yields higher than you’ll get from a tiered savings account. A large balance could generate sizable returns.

Certificate of deposit (CD) yields can be even higher, though you’ll be sacrificing liquidity. Most CDs require you to give up access to your funds until the account matures. But that might not be an issue, depending on your financial goals.

3. Integrate Your Account Into Your Overarching Financial Plan

Growing your money with a tiered savings account is just one part of your financial strategy. You might also be:

• Building your retirement nest egg with a 401(k) or individual retirement account (IRA)
• Accessing the stock market through a brokerage account
• Contributing to a health savings account (HSA)
• Exploring other low-risk investments like CDs and bonds
• Working toward other financial goals

To benefit the most from a tiered savings account, you’ll likely need a large balance. How can that money support your greater financial plan? Having a clear vision might motivate you to save more.

Mistakes to Avoid With Tiered Savings Accounts

It is possible to poorly utilize a tiered savings account. Here are some mistakes to steer clear of:

• Not comparing different accounts and tier structures
• Making the initial deposit but not adding more to the account
• Using a tiered savings account to save for long-term goals like retirement
• Putting all your money into a tiered savings account, instead of diversifying your investments
• Overlooking high-yield savings accounts, which could deliver better returns

The Bottom Line

A tiered savings account is a safe, low-risk investment that can help your money work harder. It encourages saving by paying a higher APY as your account balance increases. This type of account is ideal for storing your emergency fund or saving for short-term financial goals—but it’s still wise to compare it against a high-yield savings account or CD, which may offer better returns.

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