Save and Invest

You could earn 25 times as much interest on your money with this new savings account

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There's a new leader when it comes to savings account interest rates. Wealthfront, a fintech company that provides automated investment options and financial planning, raised interest rates offered on its new high-yield cash account to 2.57% this week.

With the national average saving account interest rate at 0.10%, that means Wealthfront users will earn roughly 25 times more in this type of account. Someone who deposits $1,000 with Wealthfront can expect to earn about $25 in interest a year with the current rate.

Launched in February, Wealthfront's cash account is a type of brokerage account that offers Federal Deposit Insurance Corporation (FDIC) insurance on balances of up to $1 million. And the best part? You don't need a high balance to start earning the 2.57% interest. It takes just a dollar to sign up and there are no fees.

You also don't need to be a current Wealthfront customer to take advantage of the account either. It's a similar sign-up process as for a savings account with Marcus by Goldman Sachs (2.25%) or Ally Bank (2.2% APY), two popular online banks that also offer above-average rates.

In a blog post announcing the rate hike, Wealthfront says it's already earned its customers over $5 million in interest since the cash account option launched less than six months ago.

The fine print

Wealthfront's interest rates are very high, but if you have a lot of cash, there may be better savings options. For example, Bankrate reports that Pennsylvania-based Susquehanna Community Bank offers a 2.53% rate on its Eagle Premium Savings account, but users need to have at least $100,000 to deposit in order to get that rate. Wealthfront offers the highest rates, however, on balances starting at just $1.

While Wealthfront's cash account doesn't have any hidden fees, it helps to know how it works. In order to provide FDIC insurance, your savings at Wealthfront is actually held at partner banks, including East West Bank, Associated Bank, TriState Capital Bank and Citi Bank. Once your cash is at the partner bank, the insurance kicks in so you can rest assured your money is safe.

As for the way it earns money, Wealthfront takes a "small portion" of the interest, according to the company. It also keeps costs low by using automation. The cash account accrues interest on a daily basis and shows up at the end of each month. Wealthfront says the interest on this account compounds monthly.

Last, you will likely receive a tax form when using this account. By law, interest earned in savings accounts is taxable. But you may not have received a notice in the past because your interest rate was so low.

Companies have to send out 1099-INT form for interest earned during the year if you have earned more than $10. If you earn less, you may not receive the form, but you are technically required to report any interest to the IRS.

The advantage of high-yield savings

Online banks, and now fintech companies like Wealthfront, are leaving traditional brick-and-mortar banks in the dust when it comes to the interest rates offered on savings accounts. Yet many Americans have no idea.

A full 62 percent of people surveyed by WalletHub last year did not realize online-only banks tend to offer higher rates and lower fees. Online banks offer savings options with interest rates that are roughly six times higher, on average, than local banks and credit unions nationwide, according to an analysis by DepositAccounts.com performed in January.

Depending on what state you're in, the difference can be even more dramatic. Oklahoma offers the highest average interest on a savings account, at 0.39%, according to DepositAccounts. Arkansas brick-and-mortar banks offers the lowest average: 0.13%.

How to bank online

"People are still a little worried about online banking or Internet-only banks," Ken Tumin, founder of DepositAccounts.com, told CNBC Make It earlier this year.

The safety and security of these banks is one concern people have, he says, and the other, perhaps more common, worry is how much access you have to your money. "That really discourages people from trying an online bank or trying these online savings accounts," Tumin says.

About two-thirds of Americans, 65%, consider it important for a bank to have a branch, according to PricewaterhouseCoopers's 2018 Digital Banking Consumer Survey. It can be a real sticking point: One in four people say they wouldn't open an account with a bank that doesn't have at least one physical branch near by.

Yet online banks offer workarounds. You may not be able to have conversations with a teller, but with Wealthfront, you can email with questions. And Marcus, for example, offers a live chat feature that connects you with a savings specialist seven days a week. Online savings accounts can be a great option for emergency savings that you don't want to be easily accessible.

To deposit money, generally, you can set up a direct deposit from your paycheck into the online savings account, or you can transfer money to it from another bank account. If you need access to your money, Wealthfront says it takes one to three days for it to be transferred to your bank account. It's working on a way for current customers to move money between their cash and investment accounts.

Additionally, Wealthfront says it's considering adding future features to its cash account that include debit card and ATM access, direct deposit, bill pay, checks and mobile check deposit.

Overall, Tumin says, "Opening a savings account at an online bank is often the easiest and best way to take advantage of higher rates."

Don't miss: The best high-yield savings accounts

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