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 holds in your name. The bank lends most of that money to other customers as mortgages, car loans, and business loans. In return for letting the bank use your money, they pay you interest — a small percentage of your balance, added to your account on a schedule the bank sets (usually monthly or daily).

You can withdraw your money whenever you want, though some accounts limit how many withdrawals you can make per month without a fee. The bank is required to keep your money separate from its own funds and insured up to $250,000 per account holder through the FDIC (Federal Deposit Insurance Corporation) if the bank fails.

The interest rate varies by bank and by how much money you have in the account. A bank offering 4.5% annual interest will add more money to your account than one offering 0.01%, so the rate matters when you are choosing where to keep your savings.

Key Takeaways

  • The bank pays you interest on the money you deposit, and that interest rate varies between banks and changes over time.
  • Your money is insured up to $250,000 by the FDIC, so you do not lose your savings if the bank fails.
  • You can withdraw money whenever you need it, though some accounts charge a fee if you withdraw more than a set number of times per month.
  • The interest you earn is taxable income, and the bank will send you a form at tax time showing how much you earned.

How interest gets added to your account

Interest is calculated as a percentage of your balance and added on a schedule. Most banks calculate interest daily but add it to your account monthly. A few online banks add interest daily, which means your interest earns interest the next day — a small advantage over time.

The rate you see advertised (called the Annual Percentage Yield or APY) is what you will earn if you leave the money untouched for a full year. If you deposit $10,000 in an account with 4.5% APY and make no withdrawals, you will have $10,450 after one year. If you withdraw $5,000 after six months, you earn interest only on the remaining $5,000 for the second half of the year.

Interest rates change. When the Federal Reserve raises or lowers its benchmark rate, banks adjust what they pay on savings accounts within days or weeks. An account paying 4.5% today might pay 3.8% next month if rates fall. This is why some people move their money between banks to chase higher rates.

Withdrawal limits and how they work

Federal rules once capped savings account withdrawals at six per month, but that rule was suspended in 2020 and has not returned. Most banks now allow unlimited withdrawals, though some still charge a fee if you exceed a certain number (often six or ten) in a month.

The fee is usually $5 to $10 per excess withdrawal. Some banks waive the fee if you keep a minimum balance or have direct deposit set up. Check your account agreement or call the bank to find out what limits apply to your specific account.

Withdrawals can happen at an ATM, through a teller at a branch, by phone, or online. Money withdrawn at an ATM usually appears in your account within one business day. Transfers to another bank take one to three business days.

How deposits work and when money shows up

You can deposit money by mailing a check, depositing cash or a check at a branch, using mobile check deposit (taking a photo of the check on your phone), or setting up direct deposit from your employer or government payments.

Cash deposits at a branch show up immediately. Checks take one to three business days to clear, depending on the bank and the amount. Mobile check deposits usually clear within one business day. Direct deposits from employers or the government show up on the date the payer sends them, which is often the same day you would have received a paper check.

Some banks hold large deposits for a few extra days as a fraud check. If you deposit $10,000 or more, the bank files a report with the government — this is normal and does not mean anything is wrong.

Fees that can reduce your balance

Most savings accounts charge no monthly fee, but some do if your balance falls below a minimum (often $500 or $1,000). A few banks charge a fee just for having the account open, though this is less common than it used to be.

The most common fees are for excess withdrawals (mentioned above), overdrafts (withdrawing more than you have), and ATM use at banks outside the network. Online banks and credit unions often reimburse out-of-network ATM fees, while traditional banks may charge $2 to $3 per transaction.

Read the fee schedule before opening an account. Many banks post this online under "Pricing" or "Fees." If you find a fee you do not like, you can switch banks — there is no penalty for closing a savings account.

How taxes work on savings account interest

Interest you earn is taxable income. At the end of each year, the bank sends you a Form 1099-INT showing how much interest you earned. You report this amount on your tax return, and you owe federal income tax on it (and state income tax in most states).

If you earned less than $10 in interest for the year, the bank may not send you a form, but you still owe tax on it if you are required to file a return. If you earned more than $1,500 in interest, the bank reports it to the IRS automatically.

The tax you owe depends on your total income and tax bracket. Someone in the 22% tax bracket who earns $1,000 in interest owes about $220 in federal tax on that interest. This is why the interest rate matters — earning 4.5% instead of 0.01% means significantly more money in your account after taxes.

The difference between savings accounts and money market accounts

A money market account is a hybrid between a savings account and a checking account. It usually pays higher interest than a savings account but limits withdrawals (often to six per month, though this varies). Some money market accounts come with a debit card or checkbook, letting you withdraw money like a checking account.

Money market accounts make sense if you want higher interest and do not need to withdraw money often. Savings accounts make sense if you want simplicity and unlimited access. Both are FDIC insured up to $250,000.

A certificate of deposit (CD) is different — you agree to leave money in the account for a set time (three months to five years) in exchange for a higher interest rate. If you withdraw before the term ends, you pay a penalty. CDs are useful for money you know you will not need for a specific period.

What happens if the bank fails

The FDIC insures deposits up to $250,000 per account holder per bank. If a bank fails, the FDIC pays you the full amount of your insured deposits, usually within a few business days. You do not have to do anything — the FDIC handles it automatically.

If you have more than $250,000 at one bank, the amount over $250,000 is not insured. To protect larger amounts, you can open accounts at different banks (each bank's $250,000 is insured separately) or open accounts in different names (such as a joint account with a spouse, which gets its own $250,000 coverage).

Bank failures are rare in the United States. The last major wave was during the 2008 financial crisis. Your money is safer in an FDIC-insured account than it is in cash under a mattress.

Frequently Asked Questions

Can I lose money in a savings account?

No, your principal (the money you deposit) is protected by FDIC insurance. The only way your balance shrinks is if you withdraw money or if fees exceed your interest earnings. Interest rates can fall, meaning you earn less, but you do not lose what you already have.

Should I keep my emergency fund in a savings account?

Yes. A savings account lets you access money quickly without penalty, and it earns interest while you wait. Keep three to six months of expenses in a savings account so you can cover unexpected costs without going into debt.

What is the difference between a savings account and a checking account?

A checking account is for money you spend regularly — it comes with a debit card and checks. A savings account is for money you want to keep and grow. Savings accounts usually pay interest; checking accounts rarely do. You can have both at the same bank.

Do I have to pay taxes on interest if I earn very little?

If you earn less than $10 in interest, the bank may not send you a form. However, you still owe tax on it if you are required to file a return. Report it on your tax return even if you do not receive a form.

Can I move my money to a different bank if I find a better interest rate?

Yes, with no penalty. You can withdraw all your money and deposit it at another bank. Some banks offer incentives to switch, such as a cash bonus for opening a new account. Moving takes a few business days because checks and transfers take time to clear.