How opening a high yield savings account can help you prepare for big financial surprises in 2021
If the coronavirus pandemic has caused you to rethink the way you spend and save money, you are not alone. According to a McKinsey report released in December 2020, 40% of Americans say the pandemic has caused them to be more spending mindful.
The financial impacts of COVID-19 have shed new light on the need for emergency savings. A Marketplace-Edison Research survey of May 2020 found that nearly 60% of Americans would struggle to foot the bill for an emergency expense of $ 1,000.
If you have room in your budget to save, a high yield savings account can be a convenient place to keep your money. Here are some of the benefits of choosing a high yield savings account online:
- Benefit from higher interest rates than a traditional savings account
- Avoid monthly service fees or minimum balance requirements
- FDIC protection protects your savings
Online banks tend to have lower overhead costs and therefore can afford to offer customers a higher savings rate. This may also be true for other deposit accounts offered by online banks, including certificates of deposit and money market accounts. No matter how much money you need to deposit, you can save some extra money with high yield savings options from Credible.
A high yield savings account can be useful for covering a number of expenses, both unexpected and unforeseen. Here are three financial surprises a high yield savings account could help you prepare for in 2021.
1. Taxes on income from unemployment
If you are one of the millions of Americans who received unemployment benefits in 2020, you may end up paying a surprise tax bill. This is because unemployment benefits are considered taxable income in most states.
When you file for unemployment, you have the option of withholding taxes from your benefits. But if you haven’t chosen to do so, you may need to settle with the IRS when you file your return. Whether taxes on unemployment income result in a debt to the government or a lower refund may depend on your overall personal financial situation, including any tax credits or deductions you may be entitled to.
If you end up with a tax bill, you could tap into your high yield savings account to pay it off. This may be preferable to using a credit card to pay, which involves paying a processing fee or taking out a personal loan.
2. Taxes on withdrawals from retirement accounts
An individual or 401 (k) retirement can be crucial to your long-term financial plan for retirement. And in an emergency situation, it can be a source of cash.
To help ease the financial pressure associated with COVID-19, the federal CARES law established temporary rules for withdrawals from retirement accounts. These rules allow withdrawals of up to $ 100,000 from qualifying retirement accounts without penalty.
This is the good news if you need the cash urgently. The bad news is that while you won’t pay the early withdrawal penalty, you will still have to pay income tax on the money you withdraw. You can spread these payments over three years, but a high-yield savings account could help cover any unexpected taxes owed for that year’s deposit.
3. Amendments W-4
The coronavirus pandemic has prompted more businesses to encourage remote working, but there may be a price to pay if you work from home for part of the year. Depending on your state’s tax laws, you may need to update your Form W-4 to reflect your new location.
If you don’t, you might not have the correct amount of tax withheld from your paychecks. The W-4 form itself is also different this year, as the IRS introduced a new, simpler version.
If you haven’t updated your form in 2020 to reflect working remotely or to accommodate the new form, you may need to pay taxes in April. This is another scenario where a high yield savings account could come in handy.
Compare high yield savings accounts online
Opening a high yield savings account is relatively easy to do. The most important step is to find the right bank.
First, consider whether it makes more sense to open an online savings account or a high yield account at a traditional bank. If you turn to an online bank, think about how easily you could access your savings if you have to dip into them for an unforeseen expense.
Then compare the details of the individual savings accounts. This includes the APY and the interest rate as well as the minimum balance requirements and fees. You can easily explore how you can earn more money with high yield savings options through Credible.