What you earn depends on the bank's rate, how much you deposit, and how long the money sits there

The amount of interest a savings account earns is determined by three things: the annual percentage yield (APY) the bank offers, the balance you keep in the account, and the time your money stays deposited. A bank paying 4.5% APY on $10,000 for one year will pay you roughly $450 in interest. The same $10,000 at 0.01% APY earns about $1. The difference between accounts at different banks can be hundreds of dollars per year on the same deposit.

Banks set their own rates based on what the Federal Reserve does with its benchmark rate, but they do not have to match it. Online banks typically offer higher rates than brick-and-mortar branches because they have lower overhead costs. Rates change frequently—sometimes weekly—so the rate you see today may not be the rate you lock in tomorrow. Some accounts offer a promotional rate for the first few months, then drop to a lower standard rate.

Key Takeaways

  • Interest earned equals your balance multiplied by the APY, divided by 365 days, then multiplied by the number of days your money was in the account.
  • Online banks currently offer higher APY rates than traditional banks, often between 4% and 5%, while brick-and-mortar banks may offer 0.01% to 0.5%.
  • Banks compound interest daily, weekly, or monthly depending on the account, meaning you earn interest on your interest if you do not withdraw it.
  • Promotional rates are real but temporary—read the fine print to see when the rate drops and what the standard rate will be.
  • The same $10,000 can earn $450 per year at a 4.5% APY account or $1 per year at a 0.01% APY account at a different bank.

How banks calculate the interest you earn

Banks use a formula based on your balance, the APY, and the number of days the money is in the account. The basic calculation is: (Balance × APY) ÷ 365 × Number of Days = Interest Earned. If you have $5,000 in an account paying 4.5% APY and leave it untouched for 365 days, you earn roughly $225. If you withdraw $2,000 after six months, the calculation changes for the remaining six months because your balance is now lower.

Most banks compound interest daily, meaning they calculate what you owe and add it to your balance every single day. This matters because on day two, you earn interest not just on your original deposit but also on the interest from day one. Over a year, daily compounding adds noticeably more money than simple interest would. A few banks compound weekly or monthly instead, which earns you slightly less.

You do not have to do any of this math yourself. Your bank statement shows the interest deposited into your account each month, and your online banking portal usually displays your current APY and projected annual earnings based on your current balance.

Why rates vary so much between banks

The Federal Reserve sets a benchmark rate that influences what banks pay, but each bank decides its own rate independently. Online banks like Marcus, Ally, and Wealthfront typically offer rates 10 to 50 times higher than traditional banks because they do not maintain physical branches, pay fewer staff, or rent office space. That lower cost structure means they can pass higher rates to depositors.

Traditional banks—Chase, Bank of America, Wells Fargo—often pay rates under 0.5% APY on standard savings accounts, even when online banks pay 4% or higher. These banks rely on customer inertia: many people keep money where they already have a checking account, even if it costs them hundreds of dollars per year in lost interest. Some traditional banks do offer higher-rate savings products, but you may need to maintain a minimum balance or meet other conditions.

Credit unions sometimes offer competitive rates, though availability depends on your membership and the specific union. Checking the rates at your current bank against rates at online banks takes five minutes and can reveal whether you are leaving money on the table.

Promotional rates and what happens when they end

Some banks advertise a high rate—5% or higher—for new accounts, then drop the rate after three, six, or twelve months. The promotional period is real: you do earn that rate during the window stated. But the fine print always specifies when the rate changes and what the standard rate will be afterward. A bank might offer 5.35% for the first six months, then drop to 4.25% for the remainder of the year, then drop again to 3.5% after that.

If you want to keep earning the highest rate, you may need to move your money to a different bank when the promotional period ends. Some people treat this as a deliberate strategy: deposit money at Bank A for six months at 5%, then move it to Bank B for six months at 5%, and so on. This works, but it requires tracking multiple accounts and transfer dates. For most people, finding a bank with a solid ongoing rate—not a promotional rate—is simpler.

Always read the terms before opening an account. The rate advertised on the homepage may apply only to new customers, only to deposits above a certain amount, or only for a limited time. The bank's website usually has a link to the full account terms, which states exactly when rates change and what the fallback rate is.

How much interest accumulates over time

Interest compounds, so the longer your money sits in the account, the more you earn—not just on your original deposit, but on the interest itself. A $10,000 deposit at 4.5% APY earns roughly $450 in year one. If you leave all of it untouched, year two earns roughly $470 because you are now earning interest on $10,450. After ten years at 4.5% with no deposits or withdrawals, your balance grows to about $15,530.

The difference between leaving money in a savings account versus a checking account (which typically earns 0% or near 0%) is substantial over time. On $10,000, the difference between 4.5% and 0% is $450 per year. Over five years, that is $2,250 in extra money, before accounting for compounding. Over ten years, it is closer to $5,000 extra.

If you make regular deposits—say, $500 per month—the math becomes more complex, but the principle is the same: higher rates earn more money, and time in the account matters. A savings calculator on your bank's website or a free online tool can show you the projected balance after a specific time period at a specific rate.

Taxes on savings account interest

Interest earned in a savings account is taxable income. If you earn $450 in interest during a calendar year, that $450 counts as income on your federal tax return. Your bank sends you a 1099-INT form in January showing how much interest you earned the previous year. You report this on your tax return, and it is taxed at your ordinary income tax rate, not at a lower capital gains rate.

The tax impact is small if you earn $100 or $200 in interest, but it grows as your balance increases. Someone earning $2,000 in interest per year will owe federal income tax on that $2,000. If you are in the 24% tax bracket, that means roughly $480 in federal tax owed on the interest alone. This is one reason why some people use tax-advantaged accounts like Roth IRAs or 529 plans for longer-term savings—interest earned inside those accounts is not taxed annually.

For a regular savings account, there is no way to avoid the tax, but you can minimize it by keeping your money in the highest-rate account available. Earning 4.5% and paying tax on it still leaves you with more money than earning 0.01% and paying no tax.

Frequently Asked Questions

Can I lock in a savings account rate so it does not go down?

No. Savings account rates are variable, meaning the bank can change them at any time without notice. Unlike a certificate of deposit (CD), which locks in a rate for a specific term, a savings account rate can drop tomorrow. However, banks rarely raise rates without announcing it, so you will know if your rate improves. If your rate drops and you do not like it, you can move your money to a different bank.

Why does my bank pay almost no interest?

Traditional banks pay low rates because they do not need to compete aggressively for deposits—many customers stay with them out of habit or convenience. Online banks, which have no physical locations, can afford to pay higher rates because their costs are lower. If your current bank pays under 0.5% APY, switching to an online bank could earn you 4% or more on the same balance.

Does the interest get deposited monthly or yearly?

Most banks deposit interest monthly, though some do it quarterly or annually. Your account agreement specifies the frequency. Monthly deposits mean you start earning interest on that interest sooner, which is why daily or monthly compounding is better than annual compounding. Check your bank's website or call to confirm how often interest is credited to your account.

What if I withdraw money before the year ends?

You earn interest only on the balance for the days it was in the account. If you deposit $5,000 and withdraw $2,000 after six months, you earn interest on $5,000 for six months, then on $3,000 for the remaining six months. The interest is calculated daily, so even partial months count. You do not lose interest for withdrawing early from a savings account—unlike a CD, which may charge a penalty.

Is there a maximum amount of interest I can earn?

No. The more money you deposit and the longer it stays, the more interest you earn. There is no cap on savings account interest. However, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder per bank, so if you have more than that, you would need to split it across multiple banks or account types to keep all of it insured.