Now Reading: Better Than a High-Yield Savings Account?
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Better Than a High-Yield Savings Account?
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Key Takeaways
- Companion bills were introduced in the U.S. House and Senate last week to create a new type of tax-free savings account for all Americans.
- If passed, it would allow you to put annual contributions in a Universal Savings Account (USA), where your earnings could grow tax-free.
- Offering the same tax benefits as a Roth IRA, a USA would be more flexible, allowing you to withdraw at any age without penalty.
- Will this be better than a high-yield savings account? It all depends on what return you can earn with a USA and what tax bracket you’re in.
The full article continues below these offers from our partners.
A New Kind of Tax-Free Savings Account
On May 1, Sen. Ted Cruz (R-Texas) and Rep. Diana Harshbarger (R-Tenn.) introduced companion bills for a Universal Savings Account (USA) Act. The legislation proposes creating a new type of tax-advantaged account that would allow all Americans to put money in savings that can earn interest that isn’t taxed.
If that kind of tax benefit sounds familiar, you may be thinking of a Roth IRA, which is a retirement account that lets you contribute a certain amount each year into a retirement fund where money grows tax-free. But unlike a Roth, which requires you to wait until age 59-1/2 to withdraw your funds without penalty, a USA would allow withdrawals at any time, no matter your age.
The money you could put in a USA would be post-tax dollars, just like the money you put into a Roth IRA. That means you can’t claim a tax deduction for your contribution. Instead, the tax break comes from not having the earnings taxed.
As currently proposed, the contribution limit for a USA is larger than for a Roth. The USA Act indicates a maximum contribution in Year 1 of $10,000, to be increased $500 each year until reaching a maximum annual limit of $25,000. By contrast, the most you can put into a Roth IRA in 2025 is $7,000 (or $8,000 for those age 50 and older).
In addition, the USA Act does not indicate that eligibility to make contributions is tied to any income limits. That differs from Roth IRA rules, which begin phasing out eligibility once a single tax filer reaches a modified adjusted gross income (MAGI) of $150,000, or a married couple filing jointly has a MAGI of $236,000.
Universal Savings Account (USA) vs. High-Yield Savings Account
So, how would a possible Universal Savings Account stack up against one of today’s best high-yield savings accounts? As with many questions, the answer is that it depends. First, it depends on what you can earn with a USA. And second, your tax bracket matters.
Let’s say you can earn 4% with a standard high-yield savings account. The interest you earn from the bank or credit union would be taxed as regular income, meaning you’ll get to keep something less than 4%. How much less is a factor of your tax bracket, which you can look up using the table below based on your taxable income.
| 2025 Income Tax Brackets | |||
|---|---|---|---|
| Tax Rate | Single Filers | Married Filing Jointly | Heads of Households |
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 |
| 12% | $11,925 to $48,475 | $23,850 to $96,950 | $17,000 to $64,850 |
| 22% | $48,475 to $103,350 | $96,950 to $206,700 | $64,850 to $103,350 |
| 24% | $103,350 to $197,300 | $206,700 to $394,600 | $103,350 to $197,300 |
| 32% | $197,300 to $250,525 | $394,600 to $501,050 | $197,300 to $250,500 |
| 35% | $250,525 to $626,350 | $501,050 to $751,600 | $250,500 to $626,350 |
| 37% | $626,350 or more | $751,600 or more | $626,350 or more |
If you’re in, say, the 22% tax bracket, you’ll keep 78% of your interest earnings (100% minus your 22% tax rate). Multiplying 0.78 by 4% leaves you with a net interest rate of 3.12%. You can see all our calculations below for a starting taxable interest rate of 3% or 4%.
| Your tax bracket | 3.00% taxable interest | 4.00% taxable interest |
| 10% | 2.70% after-tax | 3.60% after-tax |
| 12% | 2.64% after-tax | 3.52% after-tax |
| 22% | 2.34% after-tax | 3.12% after-tax |
| 24% | 2.28% after-tax | 3.04% after-tax |
| 32% | 2.04% after-tax | 2.72% after-tax |
| 35% | 1.95% after-tax | 2.60% after-tax |
| 37% | 1.89% after-tax | 2.52% after-tax |
Knowing these numbers allows you to see how much you’d have to earn in your USA in order to out-do a taxable high-yield savings account. If, for instance, you can only earn 2.00% in a USA, you’d be better off with a 3% taxable savings account that nets over 2%, unless you’re in the 35% or 37% tax bracket.
But if instead you can get close to the same rate with a USA as with a top high-yield savings account, or you are in a very high tax bracket, then a USA’s tax savings will pay off. It comes down to doing the math on what your after-tax interest rate will be for a standard account vs. your tax-free rate from a USA.
One Way a USA Could Be Huge Winner
You can likely benefit the most from a USA if you’re able to sock away money each year and not touch it for a while, allowing you to invest your money for bigger gains. Like Roth IRAs, USAs would allow the purchase of stocks, bonds, ETFs, etc., allowing much larger gains over time. However, this type of investment is not recommended for funds you may want to access in the short term.
For Now, Here’s Where You Can Earn the Most on Your Cash
Time will tell whether this proposed legislation passes, and whether Universal Savings Accounts will enter the marketplace and the tax code. In the meantime, it’s always smart to make sure you’re earning a competitive return on your money in the bank. We make that homework easy by publishing our national rankings of the highest bank deposit rates every business day.
Right now, our daily ranking of the best high-yield savings accounts includes 15 accounts that pay between 4.35% and 5.00% APY, all with the flexibility to withdraw your funds whenever you want.
In addition, you could commit a portion of your savings to a certificate of deposit (CD). The advantage of a CD is that your return is locked in for the duration of the CD, while savings account rates can drop at any time.
Say you open a 1-year CD today that earns 4.50%, which is the top rate in our ranking of the best nationwide CDs. That means that, no matter what happens to broader U.S. interest rates over the next year, your return of 4.50% will be guaranteed until next May.
Where Interest Rates Are Headed
The Federal Reserve opted this week to hold its benchmark interest rate steady, its third rate pause this year. But financial markets have priced in majority odds of three Fed rate cuts by year’s end, which would push savings and CD rates lower.
Daily Rankings of the Best CDs and Savings Accounts
We update these rankings every business day to give you the best deposit rates available:
Important
Note that the “top rates” quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher.
How We Find the Best Savings and CD Rates
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account’s minimum initial deposit must not exceed $25,000. It also cannot specify a maximum deposit amount that’s below $5,000.
Banks must be available in at least 40 states to qualify as nationally available. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
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