Tiered Savings Accounts

With a savings account, your financial institution will offer you rate of interest, which is paid to your savings balance. For many savings accounts, this is a fixed rate applied to your entire balance. With a “tiered” savings account, however, the interest rate offered will increase as the balance of your account goes up. Keep reading to learn about the different ways interest can be calculated on them, and to find out if a tiered savings account is right for you.


Why lenders offer tiered savings accounts

In case you’ve never thought about or understood how banks profit, here’s a brief explanation: banks receive deposits (the money that goes in savings accounts, guaranteed investment certificates, etc.), then take that money and loan it to customers at higher interest rates. It’s actually a pretty simply business model, when you look at it that way. Unfortunately, since this is how they all operate, all banks are competing for your business – and they do this by trying to offer the best interest rates on your deposits.

If you’ve ever compared savings account interest rates at a bank before, you’ve likely noticed that the more money you keep in your account, the higher your interest rate is; this is how tiered savings accounts operate. By offering a higher interest rate on a tiered savings account, banks give you the incentive to keep a large amount of money in the account, and to only deal with one bank for your savings needs.


Tiered savings account fees

Tiered savings accounts are just savings accounts with interest calculated in a slightly different way. As such, if you can do a transaction with a “regular” savings account, you can do it with a tiered savings account. In the same way, the possible fees that come with a “regular” savings account also apply to a tiered savings account. You can read more about these fees on the savings accounts page in our education centre.


How interest is calculated on tiered savings accounts

There are two methods banks use to calculate interest on tiered savings accounts:

  • Whole Balance Method - The bank pays interest on the whole balance at the highest tier reached.
  • Partial Balance Method - The bank pays a different interest rate for each tier of the balance.

Let’s see them both in action.


Case study: Mary’s tiered savings account

Mary has $20,000 in a tiered savings account. Her bank pays 0.20% interest on balances between $0-$4,999, and 0.40% on balances from $5,000 to $20,000. Using each of the methods explained above, how much interest would Mary make annually?

Whole balance method

Balance Interest Rate Interest Paid
$20,000 0.40% $80.00

Using the whole balance method, the entirety of Mary’s balance receives the 0.40% interest rate, resulting in $80 in interest ($20,000 x 0.40%).

Partial balance method

Tier Interest Rate Interest Paid
$0-$4,999 0.20% $10.00
$5,000-$20,000 0.40% $60.00
Total Interest Paid $70.00

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Case study: Combining the two methods

Financial institutions may also use some combination of the two methods we’ve just outlined. For example, they might provide the following information on tiers:

  • Tier 1: 0.20% ($0-$1,999) using the whole balance method
  • Tier 2: 0.25% ($2,000-$4,999) using the whole balance method
  • Tier 3: 0.40% ($5,000 to $20,000) using the partial balance method

Going back to our case study, how would Margaret’s interest be affected by the tier schedule listed above?

Combined method

Tier Balance Interest Rate Interest Paid
$0-$4,999 $4,999 0.25% $12.49
$5,000-$20,000 $15,001 0.40% $60.004
Total Interest Paid $72.49

The reason Mary gets paid 0.25% on all her savings up to $4,999 is because her balance exceeds the $1,999 threshold for the 0.20% interest rate and, for the first two tiers, the whole balance method is used. For that reason, she earns 0.25% interest on the first $4,999, and the entire remaining balance earns 0.40% interest. Using this combination of the two methods, Margaret would earn $72.49 in one year.


As always, shop around for the best interest rates

Tiered savings accounts can be a good option for people with high balances, but is likely not that effective (i.e. you won’t earn much) for anyone who only has a few thousand dollars in their account. If a tiered savings account offers a competitive interest rate (particularly on your entire balance through the whole balance method), then it may be a great option for your savings. It should, of course, always be compared to alternatives, including a “regular” or high-interest savings account that is not tiered but could provide a better interest rate. We have a long list of savings account alternatives on our site, for you to compare and choose from.