What your savings account will earn depends on the bank, the account type, and the current rate environment

The amount of interest a savings account earns is determined by three things: the annual percentage yield (APY) the bank offers, how much money you keep in the account, and how long it stays there. A bank offering 4.50% APY on a savings account will pay you $45 per year on a $1,000 balance. A bank offering 0.01% APY will pay you $0.10 on that same $1,000. The difference between these two is real money, and it matters which bank you choose.

Interest rates change constantly. Banks raise and lower their rates based on what the Federal Reserve does and what competing banks offer. A rate that is competitive today may not be in three months. The only way to know what you will actually earn is to check the current rate at the specific bank where you want to open an account, because rates vary widely even among banks of the same size.

How the bank calculates your interest also matters. Most savings accounts use daily compounding, meaning the bank calculates interest on your balance every day and adds it to your account. The more frequently interest compounds, the more you earn, though the difference is usually small for savings accounts.

Key Takeaways

  • The interest you earn is your account balance multiplied by the APY, divided by 365 days, then compounded daily in most savings accounts.
  • High-yield savings accounts at online banks currently offer rates between 4% and 5%, while traditional brick-and-mortar banks often offer less than 1%.
  • Your interest earnings are taxed as ordinary income, so you will owe federal income tax on whatever you earn.
  • Moving money between accounts does not affect how much interest you earn, but keeping your money in a low-rate account costs you thousands over time.

How banks calculate the interest you earn

The formula is straightforward: your balance times the APY, divided by 365. If you have $10,000 in an account with a 4.50% APY, you earn roughly $450 per year, or about $1.23 per day. But most banks do not pay you once a year. They calculate interest daily and add it to your account monthly or quarterly.

This daily calculation means your balance grows slightly faster than the simple math suggests, because you earn interest on the interest already added to your account. If you deposit $10,000 on January 1 and earn $1.23 per day, by February 1 your balance is $10,037.23. In February, you earn interest on $10,037.23, not just the original $10,000. This is compounding, and it is why the actual amount you earn is slightly higher than the annual rate alone would suggest.

The difference is small in savings accounts because interest rates are modest and compounding happens only once a month or quarter. Over a year, compounding might add a few dollars to your earnings. Over decades, it adds more. But the biggest factor in how much you earn is still the APY itself, not the compounding frequency.

What rates are available right now

Savings account rates vary by bank type and account type. Online banks and credit unions tend to offer higher rates than traditional banks because they have lower overhead costs. As of late 2024, high-yield savings accounts at online institutions offered rates between 4% and 5.35%, while traditional banks often offered rates below 1%. These numbers change frequently, sometimes weekly.

Regular savings accounts at large national banks typically earn between 0.01% and 0.05%. Money market accounts, which are a hybrid between checking and savings, sometimes offer slightly higher rates than savings accounts at the same bank, but not always. Certificates of deposit (CDs) lock your money away for a set period—three months, six months, one year, five years—and usually pay higher rates than savings accounts, but you cannot withdraw the money early without a penalty.

The rate you receive also depends on your account balance. Some banks offer tiered rates: a lower rate on balances under $25,000 and a higher rate on larger balances. Others offer the same rate to all customers. Read the fine print before opening an account, because the advertised rate may not apply to you if your balance is below a certain threshold.

How much you actually earn over time

The difference between a 0.05% account and a 4.50% account is dramatic over time. On a $50,000 balance held for one year, you would earn $25 at 0.05% and $2,250 at 4.50%. Over five years, that is $125 versus $11,250. Over ten years, it is $250 versus $22,500. The bank does not care which account you choose. You should.

These calculations assume you do not add or withdraw money. If you deposit money regularly—say, $500 per month—your balance grows and so does your interest. If you withdraw money, your balance shrinks and so does your interest. The bank recalculates your daily interest based on whatever balance you have on any given day.

Starting early matters because of compounding over time. A 25-year-old who deposits $10,000 in a 4.50% account and never touches it will have earned roughly $12,300 in interest by age 65. A 45-year-old who deposits the same $10,000 will earn only about $4,500 by age 65. The extra 20 years of compounding is worth $7,800.

Taxes on savings account interest

The interest you earn is taxed as ordinary income. If you earn $2,250 in interest and you are in the 22% federal tax bracket, you owe roughly $495 in federal income tax on that interest. You may also owe state income tax, depending on where you live. Some states do not tax interest income; others tax it at rates up to 13%.

Banks report your interest earnings to the IRS on a Form 1099-INT if you earn more than $10 in interest during the year. You must report this income on your tax return whether or not you receive a 1099. The IRS knows about it because the bank reported it.

This means the real return on your savings is lower than the APY suggests. A 4.50% account earning $2,250 in interest might net you only $1,755 after federal and state taxes, depending on your tax bracket. This is still far better than a 0.05% account, but it is important to understand that taxes reduce your actual gain.

Why rates change and what that means for you

Banks set their savings rates based on the federal funds rate, which is the interest rate the Federal Reserve charges banks to borrow from each other. When the Fed raises its rate, banks eventually raise their savings rates to compete for deposits. When the Fed lowers its rate, banks lower their savings rates. This lag can take weeks or months.

Your existing account rate does not automatically change when the Fed moves. Banks can lower your rate at any time with notice—usually 30 days—but they are not required to raise it. If you opened a high-yield savings account at 4.50% and rates fall to 2%, your bank might lower your rate to 2%. If rates rise to 5%, your bank might not raise your rate at all, because they already have your money.

This is why shopping around matters. If your current bank lowers your rate and competitors are offering higher rates, you can move your money. There is no penalty for moving savings between banks. You simply open a new account, transfer the money, and close the old account. The interest you already earned stays with you.

Choosing between account types

A regular savings account makes sense if you need to withdraw money frequently and want the flexibility to do so without penalty. A high-yield savings account makes sense if you have money you do not need immediately and want to earn as much as possible. A money market account is a middle ground: it usually offers a rate between a regular savings account and a high-yield account, but may require a higher minimum balance.

A CD makes sense if you know you will not need the money for a specific period and want to lock in a rate. If you need the money before the CD matures, you pay an early withdrawal penalty, which can be substantial. A one-year CD might pay 4.75%, but the penalty for withdrawing early might be three months of interest, which would cost you about $119 on a $10,000 deposit.

If you have multiple savings goals—an emergency fund you might need in three months, a down payment fund you will need in two years, and a retirement fund you will not touch for 20 years—you might use different account types for each. The emergency fund could stay in a high-yield savings account for access. The down payment fund could go into a one-year CD. The retirement fund could go into a longer-term CD or stay in a high-yield account if you want flexibility.

Frequently Asked Questions

Can I move my money to a higher-rate account without losing the interest I already earned?

Yes. The interest you have already earned is yours to keep. When you transfer money to a new bank, the old bank pays you the interest through the date you close the account. You can then move the full balance, including the interest, to the new account. There is no penalty for moving savings accounts.

What happens to my interest if I withdraw money before the end of the month?

Most banks calculate interest daily based on your balance each day. If you have $10,000 for 20 days and $5,000 for 11 days, the bank calculates interest on both balances for the days you held them. You earn interest on the full $10,000 for 20 days and on $5,000 for 11 days. You do not lose the interest you already earned by withdrawing money.

Is a high-yield savings account safe if the bank fails?

Yes, as long as the bank is FDIC-insured. The FDIC insures deposits up to $250,000 per depositor per bank. If the bank fails, the FDIC pays you back. Most online banks and credit unions are insured. Check the bank's website or call to confirm before opening an account.

Why do online banks pay more interest than big banks?

Online banks have lower costs because they do not operate physical branches. They pass these savings to customers by offering higher interest rates. Big banks have thousands of branches, which costs money, so they offer lower rates. Both are safe if they are FDIC-insured, but online banks are usually the better choice if you want to earn more interest.

Does keeping money in a savings account hurt my credit score?

No. Savings accounts do not appear on your credit report. Only borrowing activity—credit cards, loans, payment history—affects your credit score. Having a savings account and keeping money in it has no impact on your credit, positive or negative.