A savings account holds your money at a bank or credit union and pays you interest on the balance

When you open a savings account, you deposit money that the bank keeps in a vault or uses to make loans to other customers. In exchange, the bank pays you interest — a percentage of your balance, calculated daily or monthly. That interest is assistance programs the bank gives you for letting them use your funds. The amount you earn depends on the interest rate the bank offers, which changes based on what the Federal Reserve does with its own rates.

Your money stays yours. You can withdraw it whenever you want, though some accounts limit how many withdrawals you can make per month without a fee. The bank is required by law to keep your account insured up to $250,000 through the FDIC (Federal Deposit Insurance Corporation) if it's a bank, or the NCUA (National Credit Union Administration) if it's a credit union. That means if the bank fails, you get your money back.

A savings account is different from a checking account, which is designed for frequent deposits and withdrawals and usually pays little or no interest. Savings accounts are built to hold money longer and reward you for doing so.

Key Takeaways

  • Banks pay you interest on the money you keep in a savings account, and that rate varies by bank and changes over time.
  • Your deposits are insured up to $250,000 by the FDIC or NCUA, so your money is protected even if the bank fails.
  • You can withdraw your money anytime, though some accounts charge a fee if you make more than a certain number of withdrawals per month.
  • The interest you earn is added to your account automatically, usually monthly, and you earn interest on that interest the next month.

How interest gets calculated and added to your account

Banks calculate interest based on your annual percentage yield, or APY. This is the rate shown on the account terms, expressed as a percentage per year. If your account has a 4.5% APY and you keep $1,000 in the account for a full year with no deposits or withdrawals, you will earn $45 in interest.

Most banks calculate interest daily but add it to your account monthly. That means the bank looks at your balance every single day, adds up those daily amounts, and deposits the total interest once a month. Some banks add interest quarterly (four times a year) or annually (once a year). The more often interest is added, the more you earn, because you start earning interest on that interest the next period — this is called compounding.

Interest rates change. When the Federal Reserve raises its rates, banks usually raise the rates they pay on savings accounts within weeks. When the Fed cuts rates, banks cut theirs too, sometimes faster. If you opened an account at 4.5% APY six months ago, the rate might be 3.75% today. Check your bank's website or your account statement to see your current rate.

Withdrawal limits and how they work

Federal rules used to limit savings accounts to six withdrawals per month, but that rule was removed in 2020. Today, most banks allow unlimited withdrawals with no penalty. However, some banks still charge a fee if you make more than a certain number of withdrawals in a month — often three to six — so read your account agreement to know the limit for your specific account.

A withdrawal means taking money out, whether you do it at an ATM, by writing a check, by transfer to another account, or by visiting a branch. Deposits (putting money in) do not count toward the limit. If you hit the withdrawal limit, the bank may charge you a fee per extra withdrawal, or it may refuse the withdrawal entirely. Some banks will convert your account to a checking account if you exceed the limit repeatedly.

If you need to withdraw money frequently, a checking account or a money market account might be a better fit. Money market accounts pay interest like savings accounts but allow more withdrawals, though they usually require a higher minimum balance.

Minimum balance requirements and fees

Many savings accounts require you to keep a minimum balance — often $100 to $500, though some online banks have no minimum at all. If your balance drops below the minimum, the bank charges a monthly fee, usually $5 to $15. Some banks waive the fee if you set up direct deposit or keep a linked checking account with them.

Read the fee schedule before you open an account. Common fees include monthly maintenance fees, fees for falling below the minimum, fees for excess withdrawals, and fees for overdrafts (taking out more than you have). Online banks and credit unions tend to have lower fees than large brick-and-mortar banks because they have fewer physical locations to maintain.

If your account charges a monthly fee, that fee reduces the interest you earn. A $10 monthly fee on a $1,000 balance earning 4% APY ($40 per year) wipes out most of your earnings. Compare the interest rate and the fees together when choosing an account.

How FDIC insurance protects your money

The FDIC (Federal Deposit Insurance Corporation) is a government agency that insures deposits at banks. If your bank fails, the FDIC pays you back up to $250,000 per account. This protection applies to savings accounts, checking accounts, money market accounts, and CDs. It does not apply to investments like stocks or mutual funds, even if you buy them through your bank.

The $250,000 limit is per depositor, per bank, per account type. That means if you have a savings account and a checking account at the same bank, each is insured separately up to $250,000. If you have $200,000 in savings and $100,000 in checking at the same bank, both are fully covered. If you have $300,000 in one savings account, only $250,000 is insured and you lose $50,000 if the bank fails.

Credit unions are insured the same way by the NCUA (National Credit Union Administration), also up to $250,000 per account. If you want to insure more than $250,000, you can open accounts at different banks or credit unions, or open accounts in different names (like a joint account with your spouse).

Online savings accounts versus bank branch savings accounts

Online banks have no physical branches. You deposit money by transfer from another bank, and you withdraw by transferring to another account or requesting a check. Online banks pay higher interest rates than branch banks because they have lower overhead costs. A typical online savings account pays 4% to 5% APY, while a large bank branch account might pay 0.01% to 0.5%.

The tradeoff is convenience. With a branch bank, you can walk in and deposit cash or speak to a person about your account. With an online bank, you cannot. If you need to deposit cash frequently, a branch bank or credit union is more practical. If you rarely deposit cash and want the highest interest rate, an online bank is usually the better choice.

Online banks are insured by the FDIC just like branch banks. They are regulated the same way and your money is just as safe. The only real difference is how you access your account and how much interest you earn.

What happens when you close a savings account

When you close a savings account, the bank transfers your remaining balance to you — usually by check, direct deposit to another account, or wire transfer. You can close an account anytime with no penalty, even if you have not met a minimum balance requirement or held the account for a certain length of time. Some banks ask you to visit a branch in person, but most allow you to close online or by phone.

If you have pending transactions when you close the account, the bank will still process them. Make sure you know your balance and that all checks or transfers have cleared before you close. If the account goes negative after you close it (for example, a check bounces), the bank may charge you an overdraft fee and try to collect the money from you.

Closing an account does not affect your credit score. Savings accounts do not appear on your credit report because they are not credit products — you are not borrowing money.

Frequently Asked Questions

Can I lose money in a savings account?

No. Your balance can only go down if you withdraw money or the bank charges a fee. Interest only adds to your balance. The FDIC insures up to $250,000, so even if the bank fails, you get your money back.

How much interest will I earn?

It depends on the interest rate and how long you keep the money in the account. A $5,000 balance at 4% APY earns about $200 per year. A $5,000 balance at 0.5% APY earns about $25 per year. Rates change frequently, so check your bank's current rate before opening an account.

What is the difference between APY and APR?

APY (annual percentage yield) includes compounding — the interest you earn on your interest. APR (annual percentage rate) does not. For savings accounts, always look at the APY because that is what you actually earn. APR is used for loans and credit cards.

Can I have multiple savings accounts at the same bank?

Yes. Each account is insured separately up to $250,000 by the FDIC. Some banks charge a fee for each account, so check before opening more than one. You might also open accounts at different banks to insure more than $250,000 total.

Do I have to pay taxes on savings account interest?

Yes. Interest earned in a savings account is taxable income. The bank will send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The amount is usually small, but it still counts as income.