What you earn depends on the bank and the rate they set

The amount of interest you earn in a savings account is determined by two things: the annual percentage yield (APY) the bank offers and how much money you keep in the account. A bank might offer 4.50% APY on one account and 0.01% on another. The difference between these two rates means you could earn $450 per year on a $10,000 balance at the first bank, or just $1 at the second bank—on the exact same amount of money.

Banks set their own rates based on what the Federal Reserve does with its benchmark rate, how much competition exists in your area, and what type of account you open. Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. Credit unions sometimes offer competitive rates to their members. The rate you see advertised today may change next month, so the interest you earn is not locked in for the life of the account.

Interest compounds, which means you earn interest on the interest you've already earned. If your account compounds daily, you earn a tiny bit of interest each day, and tomorrow you earn interest on that new total. If it compounds monthly, the bank calculates interest once a month. More frequent compounding means slightly more money in your pocket, though the difference is usually small on savings account balances.

Key Takeaways

  • The APY you receive varies widely by bank—from under 0.01% at some traditional banks to over 5% at online banks, so comparing rates before opening an account can add hundreds of dollars to your earnings each year.
  • Banks change their rates regularly in response to Federal Reserve decisions, so a rate that is high today may drop in a few months.
  • Interest compounds at different intervals depending on the bank—daily compounding earns you slightly more than monthly compounding on the same balance.
  • You only earn interest on money that stays in the account; withdrawals reduce the balance and the interest you earn going forward.

How to find the current rate at your bank

Log into your online banking portal or call your bank's customer service line and ask for the current APY on your savings account. The rate should also appear in your account statements or in the account details section of your bank's website. If you are shopping for a new account, banks display the APY prominently on their savings account pages—it is usually one of the first numbers you see.

Be careful to look for APY, not APR. APY includes the effect of compounding, so it is the true rate you will earn. APR does not account for compounding and will understate what you actually make. Most savings accounts advertise APY, but some older or promotional materials may use APR instead.

Why rates change and what that means for your money

The Federal Reserve sets a target range for the federal funds rate, which is the rate banks charge each other for overnight loans. When the Fed raises this rate, banks typically raise the rates they offer on savings accounts. When the Fed lowers it, banks lower savings rates. This happens because banks use deposits to make loans and investments, so they adjust what they pay depositors based on what they can earn elsewhere.

Rate changes are not automatic or immediate. A bank might wait weeks or months after a Fed decision to change its savings rate, or it might change rates without any Fed action if it needs to attract more deposits or reduce costs. You may see your rate go up quickly when the Fed is raising rates, but it often falls more slowly when the Fed is cutting rates.

If you locked money into a certificate of deposit (CD), your rate is fixed for the term of the CD—usually three months to five years. With a regular savings account, your rate can change at any time, and the bank is required to notify you before the change takes effect. Some banks notify you by email or in your account portal; others send paper notices.

How much you actually earn on different balances

The math is straightforward: multiply your account balance by the APY and divide by 12 to get your monthly earnings. A $5,000 balance at 4.50% APY earns about $18.75 per month. A $50,000 balance at the same rate earns about $187.50 per month. If your rate is 0.01%, that same $50,000 earns only about $0.42 per month.

The difference between a high-yield savings account and a traditional bank account compounds over time. If you keep $10,000 in a traditional bank account paying 0.01% for one year, you earn $1. In a high-yield account paying 4.50%, you earn about $460. Over five years, that gap widens to roughly $2,400 in lost earnings.

Interest is taxed as ordinary income in the year you earn it. If you earn $500 in interest, the bank reports it to the IRS on a 1099-INT form, and you owe income tax on that $500. This means your actual take-home earnings are lower than the interest amount, depending on your tax bracket. Some people move money between accounts to manage their tax liability, though the tax savings are usually modest unless you have very large balances.

Minimum balances and account restrictions that affect earnings

Some savings accounts require a minimum balance to earn the advertised rate. If you fall below that minimum, the bank may drop your rate to a much lower one or charge you a monthly fee. Read the account terms carefully to see what minimum applies and whether it is a minimum to open the account, a minimum to earn the full rate, or a minimum to avoid fees.

Many high-yield savings accounts have no minimum balance requirement, which means you can open an account with $1 and earn the full rate. Others require $500 or $1,000 to start. A few accounts tier their rates—you earn a higher rate on the first $25,000, then a lower rate on anything above that.

Withdrawal limits can also affect your earnings. Some accounts limit how many withdrawals you can make per month without penalty. If you need to access your money frequently, check whether the account charges a fee for extra withdrawals or if it restricts how often you can move money out.

High-yield savings accounts versus money market accounts

High-yield savings accounts and money market accounts both pay interest, but they work slightly differently. A high-yield savings account is a straightforward deposit account—you put money in, earn interest, and withdraw when you need it. A money market account is a hybrid that combines features of a savings account and a checking account. Money market accounts often come with a debit card or checks, so you can access your money more easily, but they typically have higher minimum balance requirements.

The interest rates on high-yield savings accounts and money market accounts are usually similar, so the choice comes down to how you want to access your money. If you want simplicity and low minimums, a high-yield savings account is usually the better choice. If you want check-writing or debit card access and can meet a higher minimum balance, a money market account may work for you.

Both are FDIC-insured up to $250,000 per depositor per bank, so your money is protected even if the bank fails. Credit union accounts are insured by the NCUA up to the same limit.

When to move your money to a higher-rate account

If your current bank is paying 0.01% and you find a high-yield account paying 4.50%, moving your money makes financial sense. The difference in earnings is substantial enough to justify the small effort of opening a new account and transferring funds. Most banks can transfer money from another bank within one to three business days using ACH (Automated Clearing House).

Opening a new account does not hurt your credit score. Banks do a soft inquiry, which does not appear on your credit report. You can open multiple savings accounts at different banks if you want to spread your money around or take advantage of different rates for different goals.

The only reason not to move is if your current bank offers a rate that is competitive with what you can find elsewhere. Use a rate comparison tool or check the websites of online banks like Marcus, Ally, or American Express to see what is available. Rates change frequently, so what was the best rate last month may not be the best rate today.

Frequently Asked Questions

Do I have to pay taxes on savings account interest?

Yes. Interest earned on a savings account is taxed as ordinary income in the year you earn it. If you earn $500 in interest, you owe income tax on that $500 at your regular tax rate. The bank reports the interest to the IRS on a 1099-INT form if you earn $10 or more in a calendar year.

Can a bank lower my interest rate without warning?

A bank can lower your rate, but it must notify you before the change takes effect. The notification usually comes by email, mail, or a notice in your account portal. You have the right to close the account if you disagree with the new rate, though you will not earn interest on money you withdraw.

What happens to my interest if I withdraw money mid-month?

Most banks calculate interest based on your daily balance, so if you withdraw money, you earn interest only on the amount that was in the account each day. If you had $10,000 for 15 days and $5,000 for 15 days, you earn interest on the average of those two balances. Some banks use other methods, so check your account terms.

Is there a maximum amount I can earn in interest?

No. You can earn as much interest as your balance and the APY allow. However, deposits are FDIC-insured only up to $250,000 per depositor per bank, so if you have more than that, you should split your money across multiple banks to keep all of it insured.

Why do online banks pay more interest than traditional banks?

Online banks have lower overhead costs because they do not maintain physical branches. They pass some of those savings to customers in the form of higher interest rates. Traditional banks with many branches have higher costs, so they offer lower rates to maintain profitability.