What Is a Tiered-Rate Account?

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DEFINITION
Tiered-rate accounts are deposit accounts that pay different rates of interest at different balance tiers. Typically, the higher your balance, the higher the interest rate you may earn. There may be a maximum interest rate you can earn on deposits.

Tiered-rate accounts are deposit accounts that pay different rates of interest at different balance tiers. Typically, the higher your balance, the higher the interest rate you may earn. There may be a maximum interest rate you can earn on deposits.

Understanding tiered-rate accounts is important when working toward your savings goals. The more interest you're able to earn, the faster you can grow your money to reach your goal.

Definition and Example of Tiered-Rate Account

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

The difference between tiered-rate accounts and other deposit accounts lies in how interest is applied. Rather than earning the same interest rate across all balances, you might earn a lower interest rate at one account tier and a higher interest rate at another.

So, for example, you might be interested in opening a money market account. Your bank offers a tiered-rate option that would allow you to earn 0.40% on the first $10,000 you save, then 0.60% on anything you save above that amount. You don't need to do anything extra to earn the higher rate, other than increase your balance by saving more money in the account.

Online banks may offer better rates for deposit accounts, including savings, money market, and CD accounts, than traditional banks or credit unions.

How Tiered-Rate Accounts Work

Tiered-rate 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. That means that 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 requirement to earn interest
  • Interest rate
  • APY

A requirement to maintain a minimum balance in order to earn interest doesn't make an account a tiered-rate account. Remember to compare minimum deposit requirements, minimum balance requirements, and monthly fees when choosing a new account.

So if you're looking at a tiered-rate 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:

Balance Tier Minimum Balance To Earn APY Interest Rate APY
$0 to $49,999.99 $1 0.15% 0.15%
$50,000 to $99,999.99 $50,000 0.20% 0.20%
$100,000 to $249,999.99 $100,000 0.30% 0.30%
$250,000 to $999,999.999 $250,000 0.40% 0.40%
$1,000,000 and above $1,000,000 0.50% 0.50%

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.

FDIC coverage limits insure deposit accounts up to $250,000 per depositor, per account ownership type, per financial institution.

Pros and Cons of Tiered-Rate Accounts

Pros
  • Chance to earn higher rate

  • Able to grow money faster

  • Low risk

Cons
  • Money might earn more elsewhere

  • Large account balance required for highest rates

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 January 2022, the national average rate for savings accounts was 0.06%. The rate for money market accounts was slightly higher at 0.08%.
  • 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.

Key Takeaways

  • Tiered-rate accounts are deposit accounts that offer two or more interest rates that apply to specific balance levels.
  • Traditional banks, credit unions, and online banks can offer tiered-rate accounts to encourage savers to maintain larger balances.
  • It's important to consider the fees you might pay for a tiered-rate account against the interest you could earn.
  • FDIC insurance coverage has specific limits, so it may not cover the entire balance held in a tiered-rate account.

Article Sources

  1. Consumer Financial Protection Bureau. "Truth in Savings Act," Page 5.

  2. Consumer Financial Protection Bureau. "Comment for 1030.4 - Account Disclosures."

  3. Federal Deposit Insurance Corporation. "National Rates and Rate Caps."

  4. FRED Economic Data. "Federal Funds Effective Rate."

  5. Board of Governors of the Federal Reserve System. "Federal Reserve Bulletin: Changes in U.S. Family Finances From 2016 to 2019: Evidence from the Survey of Consumer Finances," Page 16.