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The term “growth savings account” or “grow savings account” generally refers to a savings account that earns more than the average interest rate for a savings account. This allows your money to grow faster, just for sitting in the bank.

But are these accounts always a good bet? Important points to consider are:

•   What is a growth savings account?

•   How do growth savings accounts work?

•   The pros and cons of a growth savings account

•   How to open a growth savings account.

What Is a Growth Savings Account?

Growth savings accounts are similar to regular savings accounts, except that they tend to pay a higher annual percentage yield (APY), which represents how much an account holder will earn in interest over the course of a year.

More commonly referred to as a high-yield savings account, these accounts can pay 10 to 20 times more than the average APY for a savings account, while keeping those funds safe and accessible.

You may get the best interest rate on a growth savings account at an online bank or credit union versus a traditional, brick-and-mortar, bank. However, even at their best, the APYs on these savings accounts generally lag behind what you could earn by investing in the market over time. That makes growth savings accounts best suited for your emergency fund and money you’re saving for a short-term goal, like a vacation or large purchase.

How Do Growth Savings Accounts Work?

Growth savings accounts work in the same way as regular savings accounts. You open the account at a bank or credit union, deposit money into the account, and begin to earn interest on your balance. You can continue adding money to the account, either by making a deposit at a branch or ATM, transferring money from a linked account, or via mobile check deposit or direct deposit.

Savings accounts are typically insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) at banks and the National Credit Union Administration (NCUA) at credit unions. So you can’t lose your money (up to certain limits) even if the bank were to go out of business.

Savings accounts allow easy access to your money when you need it, though some institutions may limit the number of withdrawals or transfers you can make to six or nine per month.

Recommended: How High-Yield Savings Accounts Work

Pros of a Growth Savings Account

Here’s a look at some of the advantages that come with opening a growth or high-yield savings account.

Higher Interest Rates

Because these savings accounts can offer higher interest rates, the money held in the account tends to grow faster than money held in traditional savings accounts. When determining what is a good interest rate, it’s a good idea to also look into minimum balance requirements. You may see that you need to keep your balance above a certain threshold to earn the highest available rate.

Accessible Form of Growth

Putting money in a savings account can be a great way to earn interest while keeping that money liquid, meaning you can access it as soon as you need it. You don’t need to sell off investments or wait until a particular maturity date to withdraw the money.

Recommended: CDs vs Savings Accounts Compared

Good Way to Build an Emergency Fund

Because these funds are fairly accessible, a growth savings account can be a great place to build an emergency fund. That way, the emergency fund can continue to grow until it might be needed.

Cons of a Growth Savings Account

There are also some downsides to growth savings accounts worth keeping in mind before opening one.

Limited Growth Opportunity

Yes, growth savings accounts typically earn more interest than traditional savings accounts. However, when considering your long-term savings options, there may be more strategic investments that can enhance growth over time. If, for instance, you’re saving for retirement, which is a few decades away, you might take a look at the stock market for growth.

Withdrawal Limits

Growth savings accounts generally provide easier access to funds than keeping money in investments. That said, you may only be able to make a certain number of withdrawals or transfers per month (such as six or nine) or risk running into fees. While the Federal Reserve withdrew this rule during the pandemic, banks are allowed to continue imposing those limits, so it’s a good idea to check.

Earnings Are Taxable Income

The interest earned in a growth savings account can count as taxable income. By contrast, the money you put into a Roth Individual Retirement Account (IRA) grows tax-free.

Recommended: What is a Roth IRA and How Does it Work?

Choosing a Growth Savings Account

When you’re looking for ways to earn more interest on your money, a growth or high-yield savings account might be a good option. It’s a good idea to shop around to find the best fit for your needs. Here are a few factors to keep in mind when looking for a new savings account:

•   APYs

•   Minimum balance requirements

•   Fees

•   Account features

•   Mobile app

•   Other product and service offerings

How to Open a Growth Savings Account

While each banking institution will have its own process, opening a growth savings account typically includes the following steps:

•   Fill out the application. When filling out a savings account application, you’ll usually provide details like your name, Social Security number, proof of address (say, from a utility bill), and government-issued photo ID.

•   Choose the account type. There may be different savings account types, such as an individual account or a joint account (to share with a spouse or family member). Select the kind that’s right for your needs.

•   Designate beneficiaries. It’s important to choose a beneficiary for your growth savings account, just as you might select a beneficiary for a 401(k) plan. This is the person who would receive the account’s funds if you were to become incapacitated or pass away.

•   Deposit funds. Some banks require a minimum initial deposit, so you may need to make that deposit to open the account.

•   Create login information. To set up your online account, you’ll need to create login information such as a username and password. Be sure to create a unique and complex password with at least one capital letter, number, and symbol.

While there may be another step or two in some situations, that’s how to open a bank account.

The Takeaway

Growth savings accounts generally offer higher interest rates than traditional savings accounts, which can help your money grow faster. In some cases, however, these accounts may come with monthly fees and/or require you to maintain a certain minimum balance to earn the higher rate, so it pays to shop around.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How do growth savings accounts work?

Growth savings accounts function similarly to traditional savings accounts. The only difference between these account types is that growth savings accounts tend to have higher interest rates.

What does “growth account” mean?

A growth account — also known as a high-yield account — typically offers a higher interest rate than a traditional savings account. This higher interest rate leads to more growth on deposited funds.

How much interest does a growth savings account earn?

These days, a growth or high-yield savings account can earn as much as 5% APY.

Photo credit: iStock/Eoneren

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOBK-Q224-1885549-V1

Social security is a right and even a rite of passage ahead for many Americans, and one it’s never too early to start better understanding and planning for.

Regulation T, or “Reg T” for short, is a Federal Reserve Board regulation governing the extension of credit from brokerage firms to investors (also called margin accounts). In margin trading, Regulation T is used to determine initial margin requirements. An investor who fails to meet the initial margin requirements may be subject to a Reg T call, which is one type of margin call.

Understanding Regulation T and Regulation T calls is important when trading securities on margin.

What Is Regulation T?

Regulation T is issued by the Federal Reserve Board, pursuant to the 1934 Securities Exchange Act. The purpose of Reg T is to regulate how brokerage firms and broker dealers extend credit to investors in margin trading transactions. Specifically, Regulation T governs initial margin requirements, as well as payment rules that apply to certain types of securities transactions.

Margin trading means an investor borrows money from a brokerage to make investments. This allows the investor to potentially increase their investment without putting up any additional money out of pocket. For example, an investor may be able to put up $10,000 to purchase 100 shares of stock and borrow another $10,000 on margin from their brokerage to double their investment to $20,000.

Regulation T is central to understanding the inner workings of margin accounts. When someone is buying on margin, the assets in their brokerage account serve as collateral for a line of credit from the broker.

The borrowed amount is repaid with interest. Interest rates charged on margin accounts vary according to the brokerage and the amount borrowed. Trading on margin offers an opportunity to amplify returns, but poses the risk of steeper losses as well.

💡 Quick Tip: When you trade using margin, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

How Reg T Works

Regulation T works by establishing certain requirements for trading on margin. Specifically, there are three thresholds investors are required to observe when margin buying, one of which is directly determined by Regulation T.

Here’s a closer look at the various requirements to trade on margin:

•   Minimum margin. Minimum margin represents the amount an investor must deposit with their brokerage before opening a margin account. Under FINRA rules, this amount must be $2,000 or 100% of the purchase price of the margin securities, whichever is less. Keep in mind that this is FINRA’s rule, and that some brokerages may require a higher minimum margin.

•   Initial margin. Initial margin represents the amount an investor is allowed to borrow. Regulation T sets the maximum at 50% of the purchase price of margin securities. Again, though, brokerage firms may require investors to make a larger initial margin deposit.

•   Maintenance margin. Maintenance margin represents the minimum amount of margin equity that must be held in the account at all times. If you don’t know what margin equity is, it’s the value of the securities held in your margin account less the amount you owe to the brokerage firm. FINRA sets the minimum maintenance margin at 25% of the total market value of margin securities though brokerages can establish higher limits.

Regulation T’s main function is to limit the amount of credit a brokerage can extend. It’s also used to regulate prohibited activity in cash accounts, which are separate from margin accounts. For example, an investor cannot use a cash account to buy a stock then sell it before the trade settles under Reg T rules. It may be beneficial to review the basics of leveraged trading to deepen your understanding, too.

Why Regulation T Exists

Margin trading can be risky and Regulation T is intended to limit an investor’s potential for losses. If an investor were able to borrow an unlimited amount of credit from their brokerage account to trade, they could potentially realize much larger losses over time if their investments fail to pay off.

Regulation T also ensures that investors have some skin in the game, so to speak, by requiring them to use some of their own money to invest. This can be seen as an indirect means of risk management, since an investor who’s using at least some of their own money to trade on margin may be more likely to calculate risk/reward potential and avoid reckless decision-making.

Example of Reg T

Regulation T establishes a 50% baseline for the amount an investor is required to deposit with a brokerage before trading on margin. So, for example, say you want to open a margin account. You make the minimum margin deposit of $2,000, as required by FINRA. You want to purchase 100 shares of stock valued at $100 each, which result in a total purchase price of $10,000.

Under Regulation T, the most you’d be able to borrow from your brokerage to complete the trade is $5,000. You’d have to deposit another $5,000 of your own money into your brokerage account to meet the initial margin requirement. Or, if your brokerage sets the bar higher at 60% initial margin, you’d need to put up $6,000 in order to borrow the remaining $4,000.

Why You Might Receive a Regulation T Call

Understanding the initial margin requirements is important for avoiding a Regulation T margin call. In general, a margin call happens when you fail to meet your brokerage’s requirements for trading in a margin account. Reg T calls occur when you fall short of the initial margin requirements. This can happen, for instance, if you’re trading options on margin or if you have an ACH deposit transaction that’s later reversed.

Regulation T margin calls are problematic because you can’t make any additional trades in your account until you deposit money to meet the 50% initial margin requirement. If you don’t have cash on hand to deposit, then the brokerage can sell off securities in your account until the initial margin requirement is met.

Brokerages don’t always have to ask your permission to do this. They may not have to notify you first that they intend to sell your securities either. So that’s why it’s important to fully understand the Reg T requirements to ensure that your account is always in good standing with regard to initial margin limits.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Regulation T is used to determine initial margin requirements — i.e. the amount of cash an investor must keep available relative to the amount they’ve borrowed. Margin trading may be profitable for investors, though it’s important to understand the risks involved. Specifically, investors need to know what could trigger a Regulation T margin call, and what that might mean for their portfolios.

An investor who fails to meet the initial margin requirements may be subject to a Reg T call, which is problematic because they are restricted from making additional trades until they deposit the 50% initial margin requirement. If the investor doesn’t have cash on hand to deposit, then the brokerage can sell off securities in the account until the initial margin requirement is met.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Photo credit: iStock/loveguli

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