Interest is the only money a savings account generates for you
A savings account makes money through interest—a percentage of your balance that the bank pays you each month or year. The amount you earn depends on three things: how much money you keep in the account, the interest rate the bank offers, and how long the money sits there.
If you have $10,000 in an account earning 4.5% annual interest, you would make roughly $450 per year, or about $37.50 per month. If the rate is 0.01%, you would make $1 per year. The difference between these two rates is real and matters—it's why the bank you choose changes how much you earn.
You do not make money through deposits, transfers, or simply having an account open. The bank only pays you interest on the balance you maintain.
Key Takeaways
- Interest rates on savings accounts range from nearly 0% to over 5%, depending on the bank and the type of account you open.
- Your earnings are calculated as a percentage of your balance, so a higher balance in a higher-rate account generates significantly more money.
- Interest compounds, meaning you earn interest on your interest—the longer money stays in the account, the more this effect builds.
- Online banks typically offer higher rates than brick-and-mortar banks, though rates change frequently and vary by institution.
- The money you earn is taxable income, and you will receive a 1099-INT form if your interest exceeds $10 in a calendar year.
How interest rates vary by bank and account type
Different banks pay different rates on the same type of account. Online banks—those without physical branches—usually offer higher rates than traditional banks because they have lower operating costs. As of early 2024, online savings accounts ranged from around 4% to 5.35%, while many brick-and-mortar banks offered 0.01% to 0.5%.
Rates change frequently, sometimes weekly. A bank might offer 5% one month and 4.75% the next. This is normal and reflects what the Federal Reserve does with interest rates. You should check current rates at the bank's website or a rate-comparison tool before opening an account, but understand that the rate you see today may not be the rate you earn next month.
Some accounts have tiered rates—meaning you earn a higher percentage on larger balances. Others offer promotional rates for new customers that drop after a set period. Read the account terms carefully to understand whether the rate you see is permanent or temporary.
The math: calculating what you will earn
Interest compounds, usually daily or monthly. This means the bank calculates interest on your balance, adds it to your account, and then calculates next month's interest on the new, larger balance. Over time, this creates a snowball effect where you earn money on the money you already earned.
Here is a concrete example. If you deposit $5,000 in an account earning 4.5% annual interest compounded monthly, you would earn approximately $187.50 in the first year. In the second year, with no additional deposits, you would earn roughly $195.70 because your balance is now $5,187.50. The difference is small in year two, but it grows larger the longer the money sits.
You can use a savings calculator (available free on most bank websites) to see what a specific balance will earn at a specific rate over a specific time period. This removes the guesswork and shows you the exact number before you open the account.
Why the bank you choose makes a real difference
The difference between a 0.5% account and a 4.5% account is enormous. On a $10,000 balance held for one year, you would earn $50 at the lower rate and $450 at the higher rate—a difference of $400 in a single year.
Over five years with no withdrawals, that same $10,000 would grow to roughly $10,250 at 0.5% but to approximately $12,350 at 4.5%. The higher-rate account generates an extra $2,100 from the same deposit, simply because the bank pays more interest.
This is why shopping for rates matters. Spending 15 minutes comparing banks before opening an account can mean hundreds of dollars in additional earnings over a few years. The highest-rate accounts are typically online banks, which you access through a website or app rather than a physical location.
Tax reporting on savings account interest
Interest you earn is taxable income. If your total interest from all sources (savings accounts, money market accounts, CDs, and other interest-bearing accounts) exceeds $10 in a single calendar year, the bank will send you a Form 1099-INT by January 31 of the following year. You must report this income on your tax return.
If you earn less than $10, the bank does not send a form, but you are still required to report the interest if you file a tax return. Keep your own records of interest earned if the amount is small.
The tax you owe depends on your overall income and tax bracket. Interest is taxed as ordinary income, not at a special rate. If you are in the 22% tax bracket and earn $450 in interest, you would owe roughly $99 in federal income tax on that amount (though state taxes may also apply).
High-yield savings accounts versus regular savings accounts
A high-yield savings account is simply a savings account that pays a higher interest rate than a standard account at the same bank or at most other banks. There is no official definition—the term is marketing language. What matters is the actual rate the account pays.
High-yield accounts are almost always offered by online banks. They work exactly like regular savings accounts: you deposit money, earn interest, and can withdraw whenever you need to. The only real difference is the rate. Some high-yield accounts have minimum balance requirements (often $0 to $25,000), while others do not.
Money market accounts are another option that sometimes pays higher rates than standard savings accounts. They function similarly to savings accounts but may have higher minimum balances and sometimes offer check-writing or debit card access. The interest rate is the key factor in deciding between account types—the features matter less than what you actually earn.
What limits how much you can earn
The amount of money you can deposit into a savings account is not limited by federal law. You can open an account with $1 or $100,000. However, some banks set their own minimum deposit requirements or minimum balance requirements to earn interest.
The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per account holder per bank. If you have more than $250,000, you should split it across multiple banks to keep all of it insured. This does not affect how much interest you earn, but it protects your money if the bank fails.
Interest rates themselves are the real limit. You cannot negotiate a higher rate with a bank—they set the rate, and you either accept it or move your money elsewhere. The highest rates available in the market at any given time set the ceiling on what you can earn.
Frequently Asked Questions
Can I make money from a savings account without depositing anything?
No. Interest is calculated on your balance, so you need money in the account to earn anything. A $0 balance earns $0 in interest, regardless of the rate the bank offers.
Do I have to pay fees that reduce my earnings?
Most online savings accounts charge no monthly fees. Some brick-and-mortar banks charge maintenance fees ($5 to $15 per month) that reduce your net earnings. Always check the fee schedule before opening an account—a high interest rate means nothing if fees eat up the earnings.
What happens to my interest if I withdraw money mid-month?
This depends on the bank's policy. Most banks calculate interest based on your daily balance, so withdrawing money reduces the amount earning interest for that month. Some banks use an "average daily balance" method. Check your account terms to understand how your bank calculates interest.
Is a savings account better than keeping money in a checking account?
Savings accounts earn interest; most checking accounts earn little to nothing. If you have money you do not need to access frequently, a savings account generates earnings that a checking account would not. The tradeoff is that savings accounts typically limit how many withdrawals you can make per month.
Will interest rates stay high, or should I lock in a rate now?
Savings account rates are not locked in—they can change at any time. You do not need to rush to open an account. If rates drop, you can move your money to a different bank offering a higher rate. Shop for the best current rate when you are ready to open an account, but do not feel pressured by false urgency.