The savings account game is heating up again as more financial companies launch products that offer sky-high interest rates. Betterment is the latest to offer customers a high-yield savings option, introducing a new account with up to 2.69% APY.
Launched Tuesday, Betterment Everyday Savings is a cash account that's offering users an interest rate that's nearly 27 times the average APY of just 0.10% for savings accounts nationwide. Someone who deposits $1,000 with Betterment can expect to earn about $27 in interest annually.
However, this is a promotional rate for new customers who sign up for access to Betterment's Everyday Checking, which is launching later this year. It's free to reserve your spot on the waitlist, and you'll lock in the 2.69% APY through the end of the year, according to the company. If you don't sign up, the current APY for the account is 2.42%.
Betterment's cash account is FDIC insured on balances of up to $1 million. It's similar to Wealthfront's offering that launched in February and offers customers 2.57% interest.
The best part? You don't need a lot of money to start earning the 2.69% interest. There's no minimum balance needed to maintain an account and there are no monthly fees. To make your first deposit, there is a $10 minimum.
"The biggest challenge for Americans when it comes to their money is saving for the future, and unfortunately a majority of the traditional banks they depend on charge extra fees, encourage cash-holding and upsell unnecessary products" Jon Stein, CEO of Betterment, said in a statement Tuesday.
Betterment will launch its Everyday Checking account complete with a Betterment Visa Debit Card. It aims to offer the account without any monthly maintenance fees and will not charge any ATM fees. Plus, if you use any ATM worldwide, Betterment will reimburse any fees the physical ATM machine operator charges.
Online banks, and now fintech companies like Betterment and 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 aren't taking advantage of these rates.
A full 62% of people surveyed by WalletHub last year didn't realize online-only banks tend to provide customers with 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.
While Betterment's cash account doesn't have any hidden fees, it helps to know how it works. Betterment is not a bank. In order to provide FDIC insurance, your savings at Betterment is held at five partner banks: Citi, Barclays, Valley National Bank, Seaside National Bank & Trust and Georgia Banking Company. Once your cash is at the partner bank, the FDIC insurance kicks in so you can rest assured your money is safe.
Betterment earns money by taking a "small portion" of the overall interest earned, up to 0.25%, according to the company. The Everyday Savings account accrues interest on a daily basis and the amount shows up on the first business day of each month.
If you sign up for the Betterment Everyday Savings account, you'll likely receive a tax form during tax season. 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.
If you're the type of person who worries about putting your money in an online financial company or online bank, there are workarounds that allow you to get help and access your money, Ken Tumin, founder of DepositAccounts.com, told CNBC Make It earlier this year.
For example, you may not be able to walk into a branch and have a conversation with a teller, but with Betterment, you can call or email with questions. To deposit money, generally, you can set up a direct deposit from your paycheck into the online savings account, or you can transfer money from another bank account.
Overall, Tumin says, "Opening a savings account at an online bank is often the easiest and best way to take advantage of higher rates."
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