What Is a Tiered-Rate Savings Account?

Definition and Example of Tiered-Rate Savings Account

A tiered-rate account is an account that has two or more interest rates applied, depending on the balance levels. A tiered-rate account can be a savings account, money market account, or even an interest-bearing checking account.

Definition

A tiered-rate savings account can help you with your savings goals since the more interest you're able to earn, the faster your money will grow and reach your financial target. The difference between tiered-rate accounts and other deposit accounts lies in how interest is applied. If the balance exceeds one of the tiers, as you add more money to the account, the next level of interest may kick in if your balance has surpassed the tier threshold.

Example

For example, you might be interested in opening a money market account. Your bank offers a tiered-rate option allowing you to earn 0.40% on the first $10,000 saved and 0.60% on balances greater than $10,000. If you had a balance of $9,000, you'd earn 0.40%. However, if you had deposited more money, bringing the balance to $20,000, your account would qualify for the next tier, and you'd earn 0.60% on the entire account balance.

How Tiered-Rate Savings Accounts Work

Tiered-rate savings accounts work by rewarding savers for keeping larger amounts of money in their deposit accounts. Truth in Savings Act rules require banks to disclose the interest rate and the corresponding annual percentage yield (APY) you can earn at each specified balance level.

In other words, before you open a tiered-rate account, you should be able to see at a glance the interest rate and APY you could earn, based on how much you save. Some of the key characteristics of tiered-rate accounts include:

• Multiple balance tiers
• Minimum opening deposit requirement
• Minimum balance required to earn interest
• Interest rate
• APY

So if you're looking at a tiered-rate savings account online, you might find one with a $5,000 or $10,000  minimum opening deposit. The bank might include a chart that looks something like this to break down rates:

This is a hypothetical example, as it doesn't necessarily reflect current interest rates banks are paying on deposits. However, it shows how banks can increase rates and APYs with tiered accounts to get savers to keep larger amounts on deposit.

The Truth in Savings Act also states that "the institution pays the stated interest rate only on that portion of the balance within the specified tier," although this method is less common. Always check with the institution to be sure which tiering method applies.

Pros and Cons of Tiered-Rate Accounts

Pros Explained

• Chance to earn higher rate: The main advantage or benefit associated with tiered-rate accounts is the opportunity to earn a higher interest rate on savings. In June 2022, the national average rate for savings accounts was 0.08%. The rate for money market accounts was slightly higher at 0.09%.
• Able to grow money faster: Depending on where you choose to open a tiered-rate account, it's possible you might earn an interest rate and APY that's five, 10, or even 20 times higher than the national average. That can help you grow your money faster. Getting the best rate possible is particularly attractive when banks lower rates in reaction to movements in the federal funds rate. This is the interest rate at which banks lend money to one another overnight. While the federal funds rate doesn't affect deposit-account rates directly, banks can use this rate as a guide for determining how much to offer to savers. So when the federal funds rate goes up, banks can pay higher rates, and they can lower them when the federal funds rate goes down.
• Low risk: With insurance by the FDIC, you’re at very low risk for losing funds in a tiered-rate savings account.

Cons Explained

• Money might earn more elsewhere: In terms of disadvantages, keeping larger amounts of money in savings isn't necessarily the best way to build wealth. This is true of all savings accounts, however, not just tiered-rate accounts. Investing money in the stock market, on the other hand, could deliver higher returns over time. This is a riskier approach than saving, but one that may be necessary to reach bigger goals, such as planning a comfortable retirement.
• Large account balance required for highest rates: Tiered-rate accounts also assume you have more money to save. In reality, the average bank account balance for most people is well below the six-figure or even five-figure mark. So if you're just getting started with saving, you may be better off with an account that pays a competitive APY, regardless of balance.
  

Alternatives to Tiered-Rate Savings Accounts

Tiered-rate savings accounts can be helpful with budgeting and saving for your financial goals, but unfortunately, the interest rate isn't always attractive. There are alternatives to tiered accounts, but they come with pros and cons as well.

Certificates of Deposit (CD)

A certificate of deposit (CD) is a version of a savings account except your money is locked up for a specific period. As a result, you may earn a higher rate of interest than a traditional or tiered savings account. However, CDs are only good if you don't need access to the money since breaking a CD before its maturity date can lead to the bank charging a fee or you might forgo any interest earned.

Treasury Securities

U.S. government securities can be an alternative to a tiered-rate savings account since the interest paid can be higher, depending on the term or length of the bond's maturity. Treasuries can have various maturity dates including one, two, five, seven, 10, and 30 years.

For example, you could buy a Treasury bond for $1,000 and you would be repaid your initial investment amount at the bond's maturity date. In return, you would usually be paid interest every six months based on the bond's interest rate—called the coupon rate.

However, you're only guaranteed your initial investment if the bond is held to its maturity. In other words, if you redeem your bond and sell it for cash before its maturity date, you could take a gain or loss depending on the purchase and sale prices.

Frequently Asked Questions (FAQs)