Interest is money your bank pays you for keeping money in your account

When you deposit money into a savings account, the bank uses that money to lend to other customers or invest it. 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 more money you keep in the account and the higher the interest rate, the more interest you earn.

Interest rates vary widely. A savings account at one bank might pay 0.01% annual interest, while another pays 4.5% or higher. The difference matters: on $10,000, the first account earns $1 per year; the second earns $450. Banks set their own rates based on what the Federal Reserve does with interest rates, how much competition they face, and what type of account you hold.

Interest is taxable income. The bank will send you a 1099-INT form at tax time if you earned $10 or more in interest during the year, and you report that amount on your tax return.

Key Takeaways

  • Interest rates on savings accounts range from near zero to over 4% depending on the bank and account type, and you should compare rates before opening an account.
  • Online banks typically offer higher interest rates than brick-and-mortar banks because they have lower overhead costs.
  • Interest compounds — meaning you earn interest on your interest — and more frequent compounding (daily versus monthly) means slightly more money in your account over time.
  • The Federal Reserve's interest rate decisions affect what banks pay, so rates rise and fall over months and years, not because of anything you do.
  • Interest earned is taxable income and must be reported on your tax return if it reaches $10 or more in a calendar year.

Where to find the highest interest rates

Online banks and online divisions of traditional banks almost always offer higher rates than in-person branches. An online bank has no physical locations, no tellers, and lower operating costs, so it can pass those savings to customers through higher interest rates. A traditional bank's online savings account may also pay more than its brick-and-mortar account, though usually less than a dedicated online bank.

Money market accounts and certificates of deposit (CDs) often pay more than regular savings accounts at the same bank. A money market account works like a savings account but may require a higher opening balance and limits how many withdrawals you can make per month. A CD locks your money away for a set period — three months, one year, five years — and pays a fixed rate; you can withdraw early but usually pay a penalty.

Rate comparison sites let you see what different banks are paying on the same day. Bankrate, DepositAccounts, and the FDIC's own BankFind tool show current rates across hundreds of banks. Rates change frequently — sometimes weekly — so a rate you see today may be different next week.

How compounding increases your earnings

Interest compounds when the bank adds interest to your account, and then calculates next month's interest on the new, larger balance. If you earn $10 in interest one month, next month the bank calculates interest on your original balance plus that $10. Over years, this creates a snowball effect where your money grows faster than simple math would suggest.

The frequency of compounding matters. Banks compound interest daily, monthly, or quarterly. Daily compounding means the bank calculates and adds interest every single day, so you earn interest on your interest more often. Monthly compounding does it once a month. On a $10,000 balance earning 4% annual interest, daily compounding earns you roughly $408 per year, while monthly compounding earns roughly $407 — a small difference, but it adds up over decades.

The bank's disclosure document (called the Truth in Savings Act disclosure) tells you the compounding frequency and the annual percentage yield (APY), which is the rate you actually earn after compounding is factored in. APY is always equal to or higher than the stated interest rate because of compounding.

How the Federal Reserve's decisions affect your interest rate

The Federal Reserve sets a target range for the federal funds rate — the interest rate banks charge each other for overnight loans. When the Fed raises this rate, banks typically raise the interest they pay on savings accounts. When the Fed lowers it, savings account rates usually fall. This happens over weeks or months, not immediately.

The Fed raised rates sharply between 2022 and 2023, and savings account rates climbed from near zero to 4% or higher at competitive banks. If the Fed lowers rates in the future, those savings rates will fall again. You cannot control this, but you can lock in a higher rate by opening a CD before rates drop, since CDs pay a fixed rate for the entire term regardless of what happens to the Fed's rate later.

Economic conditions, inflation, and employment also influence what the Fed does, but the connection between Fed decisions and your savings account rate is direct and predictable: Fed rate up, your rate goes up; Fed rate down, your rate goes down.

Minimum balances and account fees that reduce your interest

Some savings accounts require a minimum balance to earn interest — often $500, $1,000, or $2,500. If your balance drops below that threshold, the bank stops paying interest until you bring it back up. Other accounts have no minimum and pay interest on any balance, even $1.

Monthly maintenance fees, overdraft fees, and early withdrawal penalties can erase your interest earnings. A $5 monthly fee on an account earning $3 per month in interest means you actually lose $2 that month. Read the fee schedule before opening an account, and look for accounts with no monthly maintenance fee.

Some banks waive fees if you set up direct deposit, maintain a certain balance, or link the account to a checking account at the same bank. If you meet those conditions, the account may be worth opening even if the base interest rate is slightly lower than a competitor's.

How to move money between accounts to maximize interest

You can hold savings accounts at multiple banks and move money between them without penalty. Some people keep a high-yield savings account at one bank for long-term savings and a checking account at another for daily spending. Others move money into a CD when rates are high, then move it back to a savings account when the CD matures and rates have fallen.

Transfers between banks take one to three business days using ACH (automated clearing house) transfers, which are free. Wire transfers are faster — usually same-day — but cost $15 to $30. Internal transfers between accounts at the same bank are instant and free.

The FDIC insures deposits up to $250,000 per person per bank, so if you have more than $250,000 in savings, splitting it across multiple banks protects all of it. You can also increase your FDIC coverage by opening accounts in different ownership categories — a personal account, a joint account with your spouse, and a retirement account are each insured separately up to $250,000.

Tax reporting and what you owe on interest income

Interest income is taxed as ordinary income at your regular tax rate. If you earned $500 in interest and your tax bracket is 22%, you owe roughly $110 in federal tax on that interest (state taxes may apply too). The bank does not withhold this tax automatically — you pay it when you file your return.

If you earned $10 or more in interest during the calendar year, the bank sends you a 1099-INT form by January 31. You report the amount shown on line 1 of the 1099-INT on your tax return, usually on Schedule 1 (Form 1040) or directly on your return depending on your filing method. If you earned less than $10, the bank does not send a form, but you still owe tax on the interest if you had any.

Keep records of your interest earnings throughout the year. Your online banking portal shows interest deposits, and your year-end statement summarizes total interest earned. If the 1099-INT amount does not match your records, contact the bank to correct it before filing your return.

Frequently Asked Questions

Can I move my money out of a savings account without losing interest?

Yes. Withdrawals do not forfeit interest you have already earned. Interest accrues daily or monthly depending on the bank, and you keep all interest earned up to the day you withdraw. The only exception is a CD, which charges a penalty if you withdraw before the term ends — the penalty is usually several months of interest.

Why do some banks pay almost no interest?

Traditional brick-and-mortar banks often pay lower rates because they have higher costs: physical branches, tellers, and customer service staff. They also may not compete aggressively on rates because they make money from lending and other services. Online banks have lower overhead and compete primarily on interest rates, so they pay more.

What happens to my interest if I close the account?

You keep all interest earned up to the day you close the account. The bank calculates interest through your closing date and deposits it into the account before it closes, or adds it to your withdrawal. You will still receive a 1099-INT at tax time if you earned $10 or more during that calendar year.

Is a high-yield savings account the same as a money market account?

No. A high-yield savings account is a regular savings account that pays a higher interest rate, usually at an online bank. A money market account is a different product that may pay more interest but often requires a higher minimum balance and limits withdrawals to six per month. Compare rates and terms for both before deciding.

Do I have to report interest under $10?

The bank does not send a 1099-INT for interest under $10, but you still owe tax on it if you had any. Report all interest income on your tax return, even if you did not receive a form. If you earned $5 in interest, you report $5.