3 Reasons Why High-Interest Bank Accounts Aren’t Worth It

I’d had it with the next-to-0% interest Bank of America pays on checking account balances. I bet you feel the same, because it isn’t just my bank, or just checking accounts for that matter. It’s become next to impossible to get a decent interest rate.

3 Reasons Why High-Interest Bank Accounts Aren’t Worth It

The best money market accounts currently offer up to 0.6% interest, unless you’re only interested in parking a limited amount of money there, in which case you might get as much as 2% for balances up to $2000, but as you add to that balance, the blended rate drops under 0.5%.

Slim Interest-Rate Pickings Are a Real Problem

Enter High-Interest Bank Accounts

These are typically offered by small banks and credit unions because they’re exempt from the so-called Durbin Amendment to the 2010 Dodd-Frank legislation. That amendment limited the fees most card issuers can charge merchants for debit card transactions.

You Have to Jump  Through Hoops High-interest accounts make you jump through hoops, and if you fail to meet their requirements you get 0% interest (or close to it) that month.

3 Reasons Why High-Interest Bank Accounts Aren’t Actually Worth It

The Interest Payments Are Taxable

Interest payments are taxable. If your marginal tax rate (federal, state, and local) is 30%, it reduces the effective net interest (e.g.) from 1.75% to 1.225%.

We try to pay for everything using a credit card that pays a 2% reward on every purchase with no monthly limits. Of course, we always pay off the statement balance in full, to avoid interest charges.

Paying by Debit You Miss Credit Card Rewards

At the moment, the best option I’m aware of is so-called Series I Savings Bonds that you can buy directly from the U.S. Treasury. As of this writing, they pay 7.12% annual interest(!).

Better Options to Earn High Interest Without High Risk

It was a worthwhile experiment, but I’ve concluded that the time, effort, and attention I need to spend to earn that interest are simply not worth it. Given how inflation is running nearly 9x higher than what I end up with from my Connexus account, I’m seriously considering buying Series I bonds instead.

The Bottom Line