What you earn depends on the bank, the account type, and how much you have saved

The amount of interest a savings account earns is set by your bank and changes based on what the Federal Reserve does with interest rates. Right now, high-yield savings accounts at online banks pay between 4% and 5% annually, while traditional brick-and-mortar banks often pay 0.01% to 0.05%. The difference is real money: on $10,000, you might earn $400 to $500 per year at a high-yield account versus $1 to $5 at a traditional bank.

Your actual earnings also depend on how long the money sits in the account and whether you add to it or withdraw from it. Banks calculate interest daily but usually pay it monthly or quarterly. If you deposit $5,000 and leave it untouched for a year at 4.5% APY, you'll earn roughly $225. If you withdraw half of it after six months, you earn less because the balance was lower for the second half of the year.

The rate your bank offers is not negotiable, but you can shop around. Banks compete for deposits by raising rates, especially online banks that have lower overhead costs. Rates change frequently—sometimes weekly—so the 4.5% account you opened three months ago might now pay 4.2%, or a competitor might have raised theirs to 5.1%.

Key Takeaways

  • High-yield savings accounts currently pay 4% to 5% annually, while traditional bank savings accounts typically pay less than 0.1%.
  • Interest is calculated on your daily balance but paid monthly or quarterly, so withdrawals reduce what you earn that month.
  • Banks set their own rates and change them regularly, so comparing accounts across different banks can add hundreds of dollars to your annual earnings.
  • The stated APY (annual percentage yield) already includes the effect of compounding, so you don't need to calculate it yourself.

How banks calculate what you earn each month

Banks use your daily balance to figure out interest. Each day, they take the amount you have in the account, multiply it by the daily interest rate (the annual rate divided by 365), and add that to your balance. This happens every single day, even if you don't log in.

At the end of the month or quarter, the bank deposits the accumulated interest into your account. If you have $10,000 at 4.5% APY, the bank calculates roughly $1.23 per day in interest ($10,000 × 0.045 ÷ 365). Over 30 days, that's about $37. If you withdraw $5,000 on day 15, the interest for days 15 through 30 is calculated on $5,000 instead, which is about $0.62 per day.

The APY figure already accounts for compounding—the fact that interest earns interest. You don't need to do any math yourself. The rate shown is what you'll actually earn if you leave the money untouched for a full year.

Why online banks pay more than traditional banks

Online banks have fewer physical branches and lower staff costs, so they pass savings to customers by paying higher rates on deposits. A bank like Marcus, Ally, or American Express Personal Savings might pay 4.5% to 5%, while Chase or Bank of America might pay 0.01% to 0.05% on the same type of account.

This doesn't mean online banks are riskier. They're insured by the FDIC just like traditional banks, up to $250,000 per account holder per bank. The trade-off is convenience: you can't walk into a branch, and transfers to other banks take one to three business days instead of being instant.

Some traditional banks do offer high-yield savings accounts that compete with online banks, but you have to look for them. Many customers don't realize their bank has a higher-rate option because it's not advertised in the lobby.

How rate changes affect what you earn over time

When the Federal Reserve raises or lowers its benchmark rate, banks adjust their savings rates within days or weeks. If you locked in 5% last month and the Fed cuts rates, your bank will likely lower your rate to 4.5% or 4%. You don't have to do anything—the change happens automatically.

This means your earnings can fluctuate year to year. If you earned $500 in interest last year at 5% but rates drop to 3%, you'll earn $300 this year on the same balance. Conversely, if rates rise, you earn more without lifting a finger.

Some people move money between banks to chase the highest rate, but the difference is usually small enough that the hassle isn't worth it unless you have a large balance. Moving $50,000 from a 4.2% account to a 4.8% account gains you $300 per year—real money, but not enough to justify frequent switching for most people.

Comparing earnings across different account types

A standard savings account, money market account, and high-yield savings account all work the same way—the bank pays you interest on your balance. The difference is usually the rate. Money market accounts sometimes pay slightly more but may require a higher minimum balance or limit how many withdrawals you can make per month.

Certificates of deposit (CDs) lock your money away for a set period—three months, six months, one year, five years—and pay a fixed rate for that entire time. A one-year CD might pay 5.2% while a high-yield savings account pays 4.8%, but you can't touch the CD money without a penalty. If you need the cash before the term ends, you lose some or all of the interest you earned.

Money market funds and Treasury bills are different animals entirely. They're not bank products, and they carry different risks and tax treatment. For straightforward interest earnings on money you might need, a savings account or CD is simpler.

What happens to your interest if you close the account

Interest accrues up to the day you close the account. If you close on the 15th of the month, you earn interest through the 15th, and the bank pays out that accrued interest along with your balance. You won't lose interest by closing early—you just stop earning it after that date.

If you move money to a different bank, the interest you've already earned stays with you. The old bank doesn't take it back. What changes is that you stop earning interest at the old rate and start earning at the new bank's rate.

Tax treatment of savings account interest

Interest you earn on a savings account is taxable income. If you earn $500 in interest during the year, you report it on your tax return. The bank sends you a 1099-INT form in January showing how much interest you earned.

The tax you owe depends on your overall income and tax bracket. If you're in the 22% bracket, that $500 in interest costs you about $110 in federal taxes. This is one reason some people prefer CDs or Treasury bills—the interest rates are sometimes higher, and Treasury interest is exempt from state and local taxes.

If you earn less than $10 in interest during the year, the bank may not send you a 1099-INT, but you still owe tax on it if you file a return. Keep your own records of interest earned.

Frequently Asked Questions

Can I earn more interest by moving my money to a different bank?

Yes, if your current bank pays 0.05% and another bank pays 4.5%, moving $10,000 gains you about $440 per year. The process takes a few days, but the difference is worth it if you have a substantial balance. Use a bank transfer or check deposit to move the money; don't withdraw cash and redeposit it.

What's the difference between APY and APR for savings accounts?

APY (annual percentage yield) includes compounding and is what you actually earn. APR (annual percentage rate) does not include compounding and is rarely used for savings accounts. Always look for the APY number when comparing accounts.

Do I lose interest if I withdraw money before the end of the month?

No. Interest is calculated daily on your balance, so you earn interest for each day the money is in the account. Withdraw on day 15 and you earn interest for 15 days; withdraw on day 30 and you earn for 30 days. The bank pays out accrued interest when you close the account or at the regular payout date.

Is my interest safe if the bank fails?

Yes. The FDIC insures deposits up to $250,000 per account holder per bank, including interest that has accrued. If a bank fails, the FDIC pays you your full balance plus any earned interest up to the $250,000 limit.

Why do some banks offer promotional rates that are higher than their regular rates?

Banks use promotional rates to attract new customers. A bank might offer 5.5% for three months to new accounts, then drop it to 4.5% after the promotion ends. Read the terms carefully to see when the rate changes and what the regular rate will be.