What you earn depends on the bank's rate and how much you have saved

The amount of interest you earn from a savings account is determined by two things: the annual percentage yield (APY) the bank offers and your account balance. A bank paying 4.5% APY on $10,000 will pay you roughly $450 per year (before taxes). A bank paying 0.01% APY on the same $10,000 will pay you about $1 per year. The difference between these two scenarios is real money, and it comes down to which bank you choose.

Interest compounds, usually daily or monthly, which means you earn interest on your interest. If your bank compounds daily, you receive small deposits throughout the month rather than one lump sum at the end of the year. This compounds your earnings slightly, but the effect is small unless your balance is very large or the rate is very high.

The rate you see advertised is not may provide to stay the same. Banks can raise or lower their rates at any time, and they often do when the Federal Reserve changes its benchmark rate. If you lock in 4.5% today, the bank can drop it to 3% next month if they choose to. Some savings accounts offer higher rates for a limited time to attract new customers, then lower them later.

Key Takeaways

  • Your interest earnings equal your account balance multiplied by the APY, divided by 12 for a monthly estimate or by 365 for a daily estimate.
  • Online banks typically offer higher APY rates (currently 4% to 5% range) than brick-and-mortar banks (typically under 0.5%), because they have lower overhead costs.
  • Interest compounds daily or monthly at most banks, meaning you earn small amounts throughout the year rather than one payment at year-end.
  • Banks can change their rates without notice, so a rate that is high today may drop in a few weeks or months.
  • Interest earned on savings accounts is taxable income and must be reported on your tax return.

How to calculate what you will earn

The basic formula is straightforward: multiply your balance by the APY, then divide by the number of compounding periods per year. If you have $5,000 in an account paying 4.5% APY and the bank compounds interest daily, you earn roughly $225 per year, or about $0.62 per day.

Most banks show you the calculation in your account dashboard or on your statement. They list the interest earned for the month or quarter, so you can see exactly what you received. If your bank does not show this clearly, you can ask them directly what rate you are earning and how often it compounds.

The compounding effect matters more the longer your money sits and the higher the rate. At 4.5% APY with daily compounding, $10,000 grows to $10,460 after one year. At 0.01% APY, the same $10,000 grows to $10,001. Over five years at 4.5%, that $10,000 becomes $12,461. The difference between a high-yield account and a low-yield account is thousands of dollars over time.

Why rates vary so much between banks

Online banks offer higher rates than traditional banks because they do not pay for physical branches, tellers, or as much staff. They pass those savings to customers in the form of higher APY. A bank like Marcus or Ally can offer 4.5% APY because they operate almost entirely online. A bank with hundreds of physical locations cannot offer the same rate and still cover their costs.

Credit unions sometimes offer competitive rates as well, especially if you are a member. Credit unions are member-owned rather than shareholder-owned, so they can return profits to members through higher rates on savings and lower rates on loans.

Banks also adjust rates based on what the Federal Reserve does. When the Fed raises its benchmark rate, banks have more incentive to offer higher rates to attract deposits. When the Fed lowers rates, banks lower their rates too. This is why savings account rates have climbed since 2022 and why they may fall again if the Fed changes course.

Money market accounts and certificates of deposit pay differently

A money market account is a hybrid between a savings account and a checking account. It typically pays a higher rate than a regular savings account, but you may have limits on how many withdrawals you can make per month. The interest calculation works the same way: your balance times the APY.

A certificate of deposit (CD) locks your money away for a set period—three months, six months, one year, five years, or longer. In exchange, the bank pays you a higher rate than a savings account. If you withdraw the money before the term ends, you pay a penalty, usually a few months' worth of interest. CDs are useful if you know you will not need the money and want to may provide a rate for a specific period.

High-yield savings accounts and money market accounts have rates that can change. CDs lock in a rate for the entire term, so you know exactly what you will earn when you open the account.

How taxes affect your interest earnings

Interest you earn on a savings account is taxable income. If you earn $450 in interest during the year, you must report that $450 on your tax return. The bank will send you a 1099-INT form in January if you earned $10 or more in interest during the previous year.

The tax you owe depends on your overall income and tax bracket. If you are in the 22% tax bracket and earn $450 in interest, you will owe roughly $99 in federal income tax on that interest. State income tax may apply as well, depending on where you live.

This is why the real return on your savings is lower than the APY suggests. If you earn 4.5% APY and pay 22% in taxes on that interest, your after-tax return is closer to 3.5%. This does not change how much the bank pays you, but it is worth understanding when you are deciding where to keep your money.

Comparing rates across banks

The easiest way to find the highest rate is to check rate-tracking websites that list current APY across multiple banks. These sites update frequently and let you filter by account type, minimum balance, and other features. You can also visit individual bank websites directly to see their current rates.

When comparing, look at the APY, not just the interest rate. APY includes the effect of compounding, so it is the true number to use. Also check whether there is a minimum balance required to earn the advertised rate. Some banks offer 4.5% APY only if you keep at least $25,000 in the account, and a lower rate if you have less.

Opening a new account at a higher-rate bank takes about 10 minutes online. You provide your name, address, Social Security number, and initial deposit amount. The bank verifies your identity and opens the account, usually within one business day. You can then transfer money from your old account to the new one.

What happens if the bank fails

Deposits in a savings account at an FDIC-insured bank are protected up to $250,000 per depositor, per bank. If the bank fails, the FDIC steps in and makes sure you get your money back, up to that limit. This protection applies to savings accounts, money market accounts, and CDs.

If you have more than $250,000 at one bank, the amount over $250,000 is not protected. If you want to protect more than $250,000, you can split it across multiple banks or use different account ownership categories (for example, an account in your name and a joint account with your spouse are insured separately).

Credit unions have similar protection through the National Credit Union Administration (NCUA), also up to $250,000 per member, per credit union.

Frequently Asked Questions

Can I move my money to a higher-rate bank without losing interest I already earned?

Yes. Interest you have already earned belongs to you. When you transfer money to a new bank, you keep all the interest you earned at the old bank. The new bank starts paying interest at their rate on the day the money arrives in your account.

Do I have to pay taxes on interest if I earn less than $10?

No 1099-INT form is issued if you earn less than $10, but you still owe tax on any interest you earn. If you earned $8 in interest, you should report it on your tax return. Most people earning that little will owe little or no tax, but the income must be reported.

What if I withdraw money mid-year—do I lose all the interest I earned?

No. You keep all the interest you earned up to the day you withdraw. If you earned $200 in interest from January through June and then withdrew your money, you keep that $200. You simply stop earning interest on the withdrawn amount after that date.

Is a savings account or a CD better if I think rates will go up?

A savings account is better if you think rates will rise, because your rate can go up with the market. A CD locks in a fixed rate, so if rates rise after you open it, you are stuck with the lower rate. If you think rates will fall, a CD protects you by locking in today's higher rate.

How often does the bank pay interest?

Most banks compound and deposit interest monthly or daily. You see the deposits in your account statement each month. Some banks compound daily but deposit interest monthly. The frequency does not change how much you earn over a year, but daily compounding means you earn slightly more because interest compounds more often.