Interest is money the bank pays you for letting them hold your deposits
When you put money in a savings account, the bank lends that money to other customers and businesses. In return, the bank pays you interest—a percentage of your balance, calculated and added to your account on a schedule the bank sets. The percentage is called the annual percentage yield, or APY. A 4.50% APY means the bank will pay you 4.50% of your balance per year, though most banks calculate and deposit interest monthly or daily.
The amount you earn depends on three things: how much money sits in the account, what APY the bank offers, and how long the money stays there. A $10,000 balance at 4.50% APY earns roughly $450 per year. The same balance at 0.01% APY earns $1 per year. The difference between banks can be enormous, so the APY matters far more than the account name.
Interest accrues whether you do anything or not. You do not have to take any action to receive it—the bank calculates it automatically and deposits it into your account on their schedule. Some banks add interest daily, some monthly, some quarterly. The more often interest is added, the more you earn, because you start earning interest on the interest itself (called compounding).
Key Takeaways
- The APY printed on the account details tells you the yearly percentage the bank will pay; compare this number across banks before opening an account.
- Interest accrues automatically—you do not need to do anything after opening the account to receive it.
- Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs.
- Interest rates change over time and vary by bank, so the APY you see today may be different in three months.
- Money in a savings account is FDIC-insured up to $250,000, so the interest you earn is on top of that protection.
Where to find the APY before you open an account
The APY is printed on the account disclosure document the bank provides before you open the account. Online banks display it prominently on the account page. Brick-and-mortar banks often bury it in fine print or on a separate rate sheet. Do not rely on what a teller tells you verbally—ask for the written disclosure and read the APY line.
The APY changes over time. Banks raise or lower rates based on what the Federal Reserve does with interest rates. When the Fed raises rates, banks usually raise savings APY within days or weeks. When the Fed cuts rates, banks cut savings APY much more slowly, if at all. This means the best rate today may not be the best rate in six months.
You can compare APY across banks using rate-tracking websites, but verify the current rate on the bank's own website before opening an account. Rates listed on third-party sites can lag by a day or two. Call the bank directly if you see conflicting numbers.
Online banks versus traditional banks: why the APY differs
Online banks typically offer 4% to 5% APY on savings accounts, while brick-and-mortar banks often offer 0.01% to 0.05%. The difference is not because online banks are more generous—it is because they have no physical branches, no tellers, and no building costs. They pass those savings to customers in the form of higher interest rates. They also compete fiercely for deposits because they cannot rely on foot traffic.
A traditional bank may offer a higher rate on a money market account or certificate of deposit (CD) than on a regular savings account, but the savings account rate is usually much lower. If you want the highest interest on money you might need to access quickly, an online savings account is almost always the better choice.
Some online banks are divisions of larger financial institutions (like Marcus, owned by Goldman Sachs, or Ally, owned by GMAC). Others are independent. All are FDIC-insured as long as they are members of the FDIC, which you can verify on the FDIC website.
How interest is calculated and when it hits your account
Banks calculate interest using your daily balance. If you have $5,000 in the account on day one and deposit $1,000 on day fifteen, the bank calculates interest on $5,000 for fourteen days and $6,000 for the remaining days of the month. At the end of the month, it adds up all those daily calculations and deposits the total interest into your account.
Some banks calculate daily but deposit interest monthly. Others calculate and deposit daily. A few calculate quarterly or annually. The more frequently interest is deposited, the sooner you start earning interest on that interest (compounding). Over a year, daily compounding can earn you slightly more than monthly compounding, but the difference is usually small—a few dollars on a $10,000 balance.
You can see interest deposits in your transaction history. They appear as credits to your account with a label like "Interest Paid" or "Interest Deposit." If you do not see interest after a month or two, contact the bank and ask why. It is possible the rate changed, the account type does not earn interest, or there is an error.
What happens to interest rates when the Federal Reserve changes policy
The Federal Reserve sets a target range for the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises this rate, banks have an incentive to raise savings APY to attract deposits. When the Fed cuts the rate, banks have less incentive to pay you more interest.
In practice, banks raise savings rates quickly when the Fed raises rates, but cut them slowly when the Fed cuts rates. This means if you lock in a high rate during a period of rising rates, you may keep that rate for months even after the Fed stops raising. Conversely, if rates are falling, your APY will likely drop within weeks.
You cannot predict what the Fed will do, so do not try to time the market. Open a savings account at a bank offering a competitive rate now. If rates rise later and another bank offers more, you can move your money—there is no penalty for closing a savings account and transferring to another bank.
How to move money to a higher-rate account if rates change
If your current bank cuts its APY and another bank offers a significantly higher rate, you can move your money without penalty. Savings accounts have no early withdrawal fees or closing costs. You simply request a transfer or withdraw the money and deposit it elsewhere.
The fastest method is to request an ACH transfer from your current bank to the new bank. Provide the new bank with your current bank's routing number and your account number. The transfer usually takes one to three business days. You can also withdraw cash and deposit it, though that is slower and riskier.
Before you move money, make sure the new bank is FDIC-insured and that you understand any minimum balance requirements. Some banks require a minimum deposit to open an account or to earn the advertised APY. Read the account disclosure before you transfer.
Taxes on interest income and how to report it
Interest you earn on a savings account is taxable income. If you earn $100 or more in interest during the year, the bank will send you a 1099-INT form by January 31 of the following year. You must report this interest on your federal tax return, even if you do not receive a 1099-INT.
The interest is taxed at your ordinary income tax rate, not at a special rate. If you are in the 22% tax bracket and earn $500 in interest, you will owe roughly $110 in federal income tax on that interest (plus state tax if your state has income tax). This means the true return on your savings is lower than the APY suggests.
Keep records of all interest deposits for your tax records. Your bank statement shows every interest payment, so you can use that as documentation if the IRS questions your return. You do not need to do anything special—just report the total interest earned on line 1b of Form 1040.
Frequently Asked Questions
Can I earn interest on money I just deposited?
Yes. Interest accrues from the day you deposit the money. If you deposit $1,000 on the fifteenth and the bank calculates interest daily, you earn interest on that $1,000 for the remaining days of the month. The interest is small for a partial month, but it starts immediately.
What if I withdraw money before the month ends?
You still keep all the interest you have already earned. Interest accrues daily, so if you withdraw on the twentieth, you keep the interest earned from the first through the twentieth. You do not lose interest for early withdrawal from a savings account—that penalty applies only to CDs.
Why does my bank's APY look different on their website than on a rate-tracking site?
Rate-tracking websites update once or twice daily, so they may lag behind the bank's actual current rate by a few hours. Always check the bank's official website or call them directly to confirm the rate before opening an account. The bank's website is the authoritative source.
Is the interest I earn protected by FDIC insurance?
Yes. FDIC insurance covers your principal balance plus all accrued interest up to $250,000 total per depositor per bank. If a bank fails, you get your balance and all interest earned up to that point, up to the $250,000 limit.
Can I move my money to a different bank if rates drop?
Yes, with no penalty. Savings accounts have no early withdrawal fees or closing costs. You can request an ACH transfer to another bank, which usually takes one to three business days. There is no reason to stay with a bank that cuts its rate if another bank offers more.