Questioning where to keep your retirement savings? With a volatile stock market, you may be wary of putting your hard-earned money into investments that can lose value. Meanwhile, a high-yield savings account (HYSA) can offer a safe, reliable return. Today, the best HYSAs pay above 4%.
However, you could lose out in a big way if you go with a bank account over an employer-sponsored retirement account. Why? Even if you contribute to an HYSA with a competitive interest rate, your earnings won’t match the average returns you get on a 401(k). Plus, you miss out on other benefits like the ability to reduce your tax bill.
High-yield savings accounts and 401(k)s have very little in common since they’re built to serve very different purposes. HYSAs are not built to hold retirement savings, but they are great for emergency savings since they give you:
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Quick access to your money when you need it.
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Higher interest rates than most other types of deposit accounts.
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FDIC insurance to protect you from losses.
The main downside to keeping your long-term savings in an HYSA is that interest rates are variable. That means even if you start out with a rate as high as 4% to 5%, your rate could drop at any time. And historically speaking, HYSA rates don’t keep pace with inflation.
Read more: Are HYSAs less favorable when interest rates are low?
For spare cash that you don’t need access to in the next few years, a 401(k) is a much better choice. These accounts are specifically built to help you save for retirement, and average returns are much higher than savings accounts (which are further compounded by a long-term investing horizon).
Yes, your 401(k) can lose money in a volatile year, but if you spread the money across different companies and sectors (also known as diversification) and you invest for the long term, your returns will easily beat what you earn on a savings account.
Read more: What is a 401(k)? A guide to the rules and how it works.
According to a 2024 report from Vanguard, 401(k)s and other defined contribution plans earned average returns of 9.7% from December 2019 to December 2023. By comparison, the best rates you could find on a HYSA in 2018 and 2019 were near 2% APY, and in 2020 it was near 1% APY.
A high-yield savings account is not a substitute for a 401(k). Yes, you may be able to find accounts with 4% APY or more right now, but your rate can drop at any point in the future. And even if it remains high for a while, you can still earn more from a 401(k).
Read more: 15 savings accounts with interest rates of 4% APY and higher
For example, let’s say you contribute $200 a month to both types of accounts. If your HYSA consistently earns 4% APY, your account balance will hit $29,508 in 10 years.
By comparison, a 401(k) that earns 7% will be worth $34,753 in 10 years. That’s a difference of $5,245, and it doesn’t take into consideration the other financial benefits you get from investing in a 401(k), like deferred taxes.
Here are the main benefits you get from choosing a 401(k) over a high-yield savings account for your retirement savings:
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Higher average returns: It’s difficult to beat the returns you earn on a 401(k), which can average up to 8%.
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Employer match: Your employer may match a portion of your contribution, which means you get free money invested into your account.
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Tax benefits: Your contributions can be deducted from your taxable income, resulting in a lower tax bill.
That doesn’t mean an HYSA is a bad choice. In fact, it’s one of the best places you can deposit savings for an emergency fund and other short-term goals. It simply means that an HYSA is not the right account to help you reach your retirement goals.
Should I withdraw from my 401(k) and put the money into an HYSA?
You should not make an early withdrawal from your 401(k) unless you’re facing a financial emergency and have no other way to come up with the cash you need. If you do make an early withdrawal, you’ll most likely have to pay income taxes on that amount, plus an additional 10% tax.
If your employer doesn’t offer a 401(k), check to see if they have another employer-sponsored retirement plan, such as a 403(b), 457(b), SEP, or SIMPLE IRA. If not, consider opening up a traditional IRA, since these retirement accounts offer similar tax benefits to traditional 401(k)s.
After maxing out your 401(k) you might be tempted to turn to a HYSA or another bank account. Instead, consider a traditional IRA, since contributing can help you further reduce your taxable income.
Read more: How much should I contribute to my 401(k)?
