What you earn depends on the bank's rate and how much you keep in the account
A high-yield savings account earns interest at a rate the bank sets and publishes as an APY (annual percentage yield). That rate changes when the Federal Reserve changes its benchmark rate, which happens several times a year. Right now, high-yield savings accounts at online banks typically earn between 4.5% and 5.35% APY, though this varies by bank and changes weekly. A traditional savings account at a brick-and-mortar bank usually earns 0.01% to 0.05% APY by comparison.
The actual dollars you earn depend on two things: the APY the bank offers and your account balance. If you keep $10,000 in an account earning 5% APY, you earn roughly $500 per year (before taxes). If you keep $1,000, you earn roughly $50 per year. The bank calculates interest daily based on your balance and deposits it monthly or daily, depending on the bank's terms.
Key Takeaways
- High-yield savings accounts currently earn between 4.5% and 5.35% APY at online banks, while traditional savings accounts earn less than 0.1% APY.
- Your earnings are calculated by multiplying your account balance by the APY rate; a $10,000 balance at 5% APY earns about $500 per year.
- Banks change their rates when the Federal Reserve adjusts its benchmark rate, which happens multiple times per year and can raise or lower what you earn.
- Interest is taxed as ordinary income, so your actual take-home earnings will be lower than the gross amount the bank credits to your account.
- Moving money between accounts or banks takes one to three business days, so switching to a higher rate takes time but costs nothing.
How the Federal Reserve rate affects what you earn
When the Federal Reserve raises or lowers its benchmark interest rate, banks respond by raising or lowering the rates they offer on savings accounts. The Fed's rate is not a rate you earn directly—it is the rate banks charge each other to borrow overnight. But it sets the floor for what banks will pay you.
When the Fed raised rates aggressively between 2022 and 2023, high-yield savings rates climbed from under 1% to over 5%. When the Fed pauses or cuts rates, banks lower their savings rates too, sometimes within days. You do not have to do anything to see this change; the bank updates your rate automatically. But you should check your bank's current rate every few months, because some banks drop their rates faster than others when the Fed cuts.
Why online banks pay more than traditional banks
Online banks (like Marcus, Ally, and American Express Personal Savings) have lower overhead costs than banks with physical branches. They do not pay for building leases, tellers, or branch staff. They pass some of that savings to customers by offering higher APY on savings accounts. A traditional bank with branches in your town typically pays 0.01% to 0.05% APY on savings, while an online bank pays 4.5% to 5.35% APY on the same type of account.
The trade-off is convenience: you cannot walk into a branch to deposit cash or speak to someone in person. Most online banks let you deposit checks by phone camera and withdraw cash at ATMs in their network, but if you need to deposit large amounts of physical cash regularly, a traditional bank may be more practical despite the lower rate.
How interest compounds and when you see the money
Interest compounds daily at most high-yield savings accounts, meaning the bank calculates interest on your balance plus the interest you have already earned. If you earn $5 in interest one day, the next day's interest is calculated on your original balance plus that $5. Over a year, this compounds to slightly more than simple interest would give you.
The bank deposits interest into your account monthly or daily, depending on the bank. You can withdraw it immediately once it hits your account. Some banks show pending interest in your balance before it officially posts; others do not. Check your bank's website or app to see when interest posts and whether you can see it before it arrives.
Taxes on high-yield savings interest
Interest you earn on a savings account is taxed as ordinary income at your federal tax rate. If you earn $500 in interest and your tax bracket is 22%, you owe roughly $110 in federal taxes on that interest. Your bank will send you a 1099-INT form in January if you earned $10 or more in interest during the year, and you report that amount on your tax return.
Some states also tax savings interest, though a few states exempt it. Your actual take-home earnings are lower than the gross APY suggests once you account for taxes. A 5% APY account earning $500 might net you $390 after federal taxes, depending on your bracket.
Comparing rates across banks and switching accounts
High-yield savings rates vary by bank and change frequently. Marcus, Ally, American Express Personal Savings, and Wealthfront are common options, but rates shift weekly. You can compare current rates on sites that track them, though you should verify the rate on the bank's own website before opening an account.
If your current bank drops its rate and another bank offers a higher rate, you can move your money. Transferring funds between banks takes one to three business days through ACH transfer. You do not lose interest during the transfer—the old bank pays interest through the day you withdraw, and the new bank starts paying interest the day the funds arrive. There is no fee to move money between banks, and you can open a new account online in minutes.
How much you need to open a high-yield savings account
Most online banks have no minimum deposit requirement to open a high-yield savings account. You can open an account with $1 and earn the full APY on that dollar. Some banks waive monthly fees if you maintain a minimum balance, but high-yield savings accounts rarely charge monthly fees regardless. A few banks offer slightly higher rates if you maintain a larger balance, but this is uncommon.
The main limit is the FDIC insurance cap: the FDIC insures up to $250,000 per depositor per bank. If you have more than $250,000 to save, you can split it across multiple banks to keep all of it insured, or use a sweep service that automatically moves money across accounts to stay under the limit.
Frequently Asked Questions
Can I lose money in a high-yield savings account?
No. Your principal is protected by FDIC insurance up to $250,000 per bank. The interest rate can go down, which means you earn less going forward, but the money you have already deposited stays in your account. The only way to lose money is if you withdraw more than you deposited, which is your choice.
How often do banks change their high-yield savings rates?
Banks can change rates at any time, though most change weekly or monthly. When the Federal Reserve meets and adjusts its benchmark rate, banks typically respond within days. Between Fed meetings, rates may stay stable or shift slightly depending on market conditions and the bank's strategy.
Is a high-yield savings account the same as a money market account?
They are similar but not identical. Both earn interest and are FDIC insured. A money market account may offer check-writing or a debit card, while a high-yield savings account typically does not. Money market rates are usually comparable to high-yield savings rates. Choose based on whether you need check-writing or a debit card.
What happens to my interest if I withdraw money mid-month?
You earn interest on your balance through the day you withdraw. If you have $10,000 on the first of the month and withdraw $5,000 on the 15th, you earn interest on $10,000 for 14 days and $5,000 for the remaining days of the month. The bank calculates this automatically.
Should I move my money if another bank offers a higher rate?
If the rate difference is significant (0.5% or more) and you have a large balance, moving makes sense. The transfer takes one to three business days and costs nothing. For small balances under $5,000, the extra earnings may not justify the effort. Calculate the annual difference: if you have $5,000 and rates differ by 0.5%, you earn $25 more per year at the higher rate.