Brokerage vs High-Yield Savings Account: Key Differences

Rebecca SafierUpdated July 28, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

As you’re planning how to save for the future, you might compare brokerage accounts vs. high-yield savings accounts. Both types of accounts can help you meet your savings goals, but they serve different purposes. A brokerage account tends to be better for long-term wealth building, but it comes with higher risk. A savings account, on the other hand, is a low-risk option that’s better suited for stashing your emergency fund and meeting short-term savings goals. Read on for a closer look at brokerage accounts and high-yield savings accounts to understand how they can work in concert to help you achieve your financial goals.

Understanding Brokerage Accounts and How They Work

Brokerage accounts allow you to purchase stocks, bonds, and other risk assets. These accounts may include individual retirement accounts (IRAs) and taxable brokerage accounts.

IRAs: IRAs are tax-advantaged accounts designed to help you save for retirement. You’ll get a tax break on your contributions and earnings, but you usually have to wait until you’re 59 ½ to withdraw your money without penalty.
Taxable brokerage accounts: People often invest in brokerage accounts if they have money left over after investing in a retirement savings account. These accounts don’t have the tax advantages of an IRA or employer-sponsored 401(k), but they allow you to purchase index funds, stocks, and other assets.

Brokerage accounts may have a higher return than high-yield savings accounts, but it all depends on the market. Your savings can rise and fall depending on the performance of your investments. It’s generally a good idea to invest long-term so your savings can weather downs in the market. Recommended: Savings Account vs Roth IRA: Key Differences

When to Use a Brokerage Account

A brokerage account is usually best if you can set aside your money for a minimum of five years. In the case of a retirement savings plan, the account is best if you can leave it in the account until you’re at least 59 ½. A brokerage account can also be a good fit if you’re comfortable with a certain amount of risk. Some investments have less risk, such as Treasury bonds, while others have higher risk, such as individual stocks. You might choose to work with a financial advisor or opt for an account with a robo-advisor to find an investment strategy that aligns with your goals and risk tolerance.

Tips for Picking a Good Brokerage Account

There are a wide variety of brokerage accounts to choose from today. As you’re comparing your options, consider the following features:

Fees and commissions. Find out about the fees, commissions, and any penalties that come with the account. If you’re only making a few stock trades per year, the charge per stock trade may not be a major expense.
Selection of funds. Make sure the financial institution you choose offers a variety of proprietary funds that meets your savings goals. Online brokerage providers like Fidelity and Charles Schwab offer thousands of funds to investors.
Resources and support. If you’re new to investing, it might be good to look for brokerage accounts that come with educational resources, tools, and support. You might opt for an account that comes with hands-on management from a financial advisor or a robo-advisor, which provides automated portfolio management.
Account deposit minimums. Some accounts have no minimum deposits, while others have higher thresholds.

Understanding High-Yield Savings Accounts and How They Work

High-yield savings accounts are similar to traditional savings accounts, but they offer better rates. While the average annual percentage yield (APY) on a traditional savings account is only 0.42%, high-yield savings accounts offer rates of 4.15% and higher. However, those rates can fluctuate up and down as the Federal Reserve adjusts rates. You’ll never lose money in a savings account, though, and your savings are FDIC-insured for up to $250,000. With a savings account, you can deposit and withdraw money as you like with no penalty. Direct withdrawal isn’t possible, though — you’ll need to transfer the money to a checking account to take out cash. Many banks have no minimum deposit, making it easy to set up your high-yield savings account. You also have the option of setting up automatic transfers from a checking account if you want to automate your savings.

When to Use a High-Yield Savings Account

A high-yield savings account is a smart place to store your emergency fund and cash for short-term savings goals. It’s completely liquid, meaning you can withdraw cash whenever you need it, as long as you transfer it to a checking account first. That doesn't mean you should store the money for your monthly bills here — that’s probably better kept in your checking account. But if you’re saving up for a vacation or a new car, stashing it in your savings account makes sense. A high-yield savings account is basically risk-free, but it’s not great for long-term wealth creation. The returns may be lower than what you could get from investing in the stock market. Recommended: What Is a Cash Management Account (CMA)?

Tips for Choosing the Right High-Yield Savings Account

Every financial institution offers its own rates and terms, so it’s worth comparing your options with multiple banks. Here are some features to keep an eye on:

APY. Your top priority is finding a bank that offers a high rate on your savings. Keep in mind that the rate is variable and could increase or decrease over time.
Minimum deposits. Find out if the bank requires you to make a certain minimum deposit to open your account.
Monthly fees. Look out for any fees that you may have to pay to maintain your account. Most banks don’t charge fees as long as you have a certain amount in your savings account.
Access to cash. Consider how easy it is to contribute to and withdraw from your high-yield savings account. It’s often easiest to keep your checking and savings accounts at the same bank for immediate transfers between the two.

Brokerage Accounts vs High-Yield Savings Accounts

Brokerage accounts and high-yield savings accounts can earn you a return on your money over time, but they have key differences and serve different purposes. Brokerage accounts allow you to invest in the market and are best for long-term investing of five years or more. It’s possible to lose money if the market is down, but you can reduce risk by diversifying your portfolio and investing for the long haul. You won’t lose your money in a savings account (it’s insured for up to $250,000), but it also won’t grow all that much over the long term. A savings account is usually best for storing an emergency fund and short-term savings. Extra cash you have above that may be best suited to a brokerage account or retirement savings account.

	Brokerage Account	High-Yield Savings Account
Rate of return	Potentially higher	Usually lower
Negative return possible?	Yes	No
Risk level	Higher	Lower
Access to cash	Readily available for non-IRA brokerage accounts; for IRA accounts, accessing cash could come with fees	Can withdraw at any time without penalties
Best for	Long-term savings goals, saving for retirement	Emergency fund, short-term savings goals

The Takeaway

Both a brokerage account and high-yield savings account could have a place in your financial plan. First, focus on building an emergency fund in your savings account so you have liquid cash for unexpected expenses. Once you’ve saved your rainy day fund, consider saving in a retirement savings plan. If you have additional money, consider opening a brokerage account. If you can invest your money for five years or more, a brokerage account could help you meet your financial goals.Explore high-yield savings accounts with Lantern by SoFi today!

Frequently Asked Questions

Is it possible to get a very high annual percentage yield from my brokerage account?

Are brokerage accounts safer than high-yield savings accounts?

Is it financially smart to choose savings above investment?

Is a bank safer than a brokerage account?

Where should I keep my money if I don't feel like investing?

Photo credit: iStock/PixelsEffect

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About the Author

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).

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