High-Interest Bank Accounts

Those of us who’ve been around a while remember when banks had decent interest rates. What’s the interest on your savings account now? 0.05%? 0.01%? Maybe even 0% because your balance isn’t above $10,000? In the past decade, interest rates have varied wildly as the economy has gone from good to bad and back, although most big banks and even smaller credit unions are fine with low interest being the status quo even when rates should have improved.

A better return on money can usually be found by investing in CDs, stocks, bonds, or mutual funds. Utilizing these methods is suggested, especially when there are tax breaks like with a retirement account, but you give up fluidity. Fluidity means that you have easy access to the money. You may be able to cash in your CD or withdraw from your retirement early, but you’ll face penalties. A high-interest bank account may offer fluidity and a decent return.

In the mid-2000s, there was a marketing blitz by banks that did business through the Internet. I have fond memories of ING Direct and their 4%+ interest rates with no fees, no requirements to obtain that interest, and no maximum balance. Those days are long gone, but there’s still a lot to find out there.

Typically, the highest-interest accounts are checking accounts. When it comes to savings/money-market accounts, the federal rule called Regulation D prohibits more than six transfers in a month. That includes transfers from savings to checking and savings to an externally linked account, also called ACH, among others. Transfers from another account into the savings account do not count towards this limit. Aside from the annoyance of these rules, people are more likely to use their checking accounts, because they may get checks and they use a debit card tied to the account, both of which the bank likes.

First, let’s start off with the lower-interest options. A variety of both checking and savings accounts pay in the 0.5% to 2% interest range. These accounts typically have no fees or requirements, but be sure to read the fine print. Dozens of banks may be worth considering, although I’ll only mention a few: As of this writing, Emigrant Direct is offering 0.5%, Discover 1.8%, and Barclay’s US is at 1.9%. All of these accounts can be opened online and without walking into any branch.

Next, some higher-interest options go up toward 5%, but they have some requirements or fees, although the fees can usually be avoided by keeping a sufficient balance in the account or by other actions. These accounts currently include Consumers Credit Union in Illinois and Lake Michigan Credit Union in Michigan and are almost universally checking accounts. If you search for high-interest accounts on the Internet, you might not find them all, because many websites don’t consider accounts that require more steps than just depositing money.

Lake Michigan Credit Union checking accounts can be opened online and you can earn 3% on your money, but of course it’s not that simple. First, the 3% interest only applies to balances up to $15,000; you can put more money in, but it won’t earn 3%. Other requirements include 10 transactions per month on the associated debit card, use of paperless statements, and, oddly enough, you must login to your account on their website at least four times per month.

Consumers Credit Union checking accounts can be opened online and earn up to 4.59% on balances up to $10,000. An interest rate of 3.09% is earned if you do 12 debit card transactions per month, direct deposit or transfer $500 from an external account into the account per month, and sign up for paperless statements. The highest rate of 4.59% is earned if you get the associated credit card (which will incur a hard pull and new account) and spend more than $1,000 per month.

Note that Consumer’s Credit Union is the only account that requires a hard pull, and only when you opt to take the credit card to go for the higher interest rate. Banks typically use a service such as ChexSystems to verify that applicants haven’t written bad checks in the past.

Regardless of if it’s a checking or savings account, if you earn more than $10 in interest in a calendar year, you’ll be issued a 1099-INT form the following year, which is used for your taxes. The 1099-INT isn’t required to be issued if the interest is below $10, although many banks will send it anyway. Essentially, the interest is added to your income and you’ll pay the appropriate marginal tax rate on it.

As you can see, with a little bit of work, you can easily earn $150+ per year in interest in just one bank alone and, if you’re willing to jump through some hoops, you can go for the higher-interest accounts that have requirements or restrictions. Automated transfers and bill payments can minimize the long-term effort you need to manage these accounts.

One last caveat: All of these banks will eventually change terms and interest rates, so you may eventually feel it best to move your money to a better account. ING Direct has been absorbed into Capital One 360 where the interest currently sits at 1.85% and only on balances above $10,000. Emigrant Direct used to have the highest rate, but now its 0.50% isn’t competitive. Consumers Credit Union used to offer 5.09% interest on balances up to $20,000, but in the past month they dropped the rate and cut the maximum balance in half.