The thumbnail file size limit
Almost every guide states the YouTube thumbnail limit as 2 MB, full stop. That is only half true, and the missing half is the reason people compress good images into mush for no reason at all.
There are two limits, not one
YouTube's documentation gives a file size limit that depends on where the upload comes from: 2 MB when uploading from a mobile device, and up to 50 MB from a desktop browser.
That is a twenty-five-fold difference, and it changes the whole decision. From a computer you can send a full-resolution PNG and let YouTube do the compressing. From a phone you have to make choices.
If you have ever wondered why your thumbnail looked crisp in the editor and soft on YouTube, the most common cause is compressing hard to clear a limit that did not apply.
What to do when you are over the limit
In order of how much quality they cost you, cheapest first. Switch from PNG to JPG. For a photographic design this alone usually cuts the file by three quarters and the visible difference is nil, because photographs are what JPG is good at.
Reduce the resolution. Going from 3840 x 2160 to 1920 x 1080 quarters the pixel count. On a design that is flat colour and type this is nearly invisible; on a fine-detail photograph you will see it on a large screen.
Lower the JPG quality. This is the last resort because it is the one that produces the ugly failure mode: blocky halos around hard-edged text. If your design is type-heavy, do this least.
Why PNG files get so large
PNG is lossless, which means it stores every pixel exactly. That is ideal for flat colour and sharp type — an image of solid blocks compresses enormously well and stays perfectly crisp.
It is the wrong format for photographs. A photograph has no repeated flat regions to compress, so a photographic PNG at 3840 x 2160 can easily run to several megabytes while an equivalent JPG is a few hundred kilobytes with no visible difference.
The rule that follows: PNG for designs, JPG for photographs. A design that is a photograph with type on top is a photograph for this purpose.
YouTube re-encodes whatever you send
Your file is not what viewers see. YouTube generates its own derivatives at several sizes and serves whichever fits the surface, which means a second lossy compression pass on top of yours.
Stacking two lossy passes is what produces the muddy, artefact-ringed thumbnails you see everywhere. The defence is to make your pass as gentle as possible, because you cannot control theirs.
In practice: a large, lightly compressed source survives re-encoding noticeably better than a small, heavily compressed one, even when the final displayed size is identical.
Getting the size right in the editor
The download panel offers PNG and JPG at each size, so the fastest approach is to export both and look at the file sizes. If the JPG is comfortably under your limit and looks right at feed size, use it.
For a phone upload, exporting at 1920 x 1080 as JPG will nearly always land well under 2 MB while staying far sharper than the old 1280 x 720 standard. For a desktop upload, there is no reason not to send the largest version you have.
Quick answers
Is the YouTube thumbnail limit 2 MB?
From the mobile app, yes. From a desktop browser it is much higher — up to 50 MB according to YouTube's documentation.
Will a smaller file rank worse?
No. File size is not a ranking factor. It affects how sharp the image looks, which affects whether people click, which is a different mechanism.
PNG or JPG?
PNG for flat colour and hard-edged text. JPG for anything mostly photographic, or when you need to get under the mobile limit.