What you earn depends on the bank, the account type, and the current rate environment

A savings account earns interest by paying you a percentage of the money you keep deposited. The amount you receive depends on three things: the annual percentage yield (APY) the bank offers, how much money sits in the account, and how long it stays there. Right now, savings accounts at online banks typically pay between 4% and 5.35% APY, while brick-and-mortar banks often pay 0.01% to 0.5% APY. The difference is real money: $10,000 earning 4.5% APY makes $450 per year, while the same $10,000 at 0.01% makes $1 per year.

Interest rates change constantly. Banks set their own rates based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, banks eventually raise what they pay depositors. When the Fed cuts rates, banks cut what they pay you. This means the rate you see today will not be the rate you earn next month or next year.

Most savings accounts compound interest daily or monthly, meaning the interest you earn gets added to your balance, and then you earn interest on that interest. The more often interest compounds, the slightly more you earn—but the difference is small unless you have a large balance.

Key Takeaways

  • Online banks currently pay 4% to 5.35% APY on savings accounts, while traditional banks pay 0.01% to 0.5%, a difference of hundreds of dollars per year on the same deposit.
  • Your earnings depend on three factors: the APY rate, your account balance, and how long the money stays deposited.
  • Banks change their rates when the Federal Reserve changes its benchmark rate, so the APY you see today may be lower or higher in three months.
  • Interest compounds daily or monthly at most banks, meaning you earn small returns on your accumulated interest.

How to calculate what you will earn

The formula is simple: multiply your balance by the APY, then divide by 365 (or 12 if you want a monthly estimate). A $5,000 balance at 4.5% APY earns roughly $225 per year, or about $18.75 per month. A $25,000 balance at the same rate earns $1,125 per year, or about $93.75 per month.

Most banks show you the projected annual earnings right on the account page or in the account details. Some also show you how much interest you earned in the current month. If your bank does not display this, you can ask customer service or calculate it yourself using the formula above.

Keep in mind that the rate can drop at any time. If your bank cuts the APY from 4.5% to 3.5%, your annual earnings on that $5,000 drop from $225 to $175. This is why comparing rates across banks matters—if one bank drops its rate significantly, you can move your money to another bank offering a higher rate.

Why online banks pay more than traditional banks

Online banks have lower overhead costs than branches with physical locations, staff, and real estate. They pass some of those savings to customers by paying higher interest rates. A bank with no branches can afford to pay 4.5% APY because it does not have to maintain buildings or employ tellers. A traditional bank with hundreds of branches has higher costs and pays less to depositors.

This does not mean online banks are riskier. Most online banks are FDIC-insured just like traditional banks, meaning your deposits up to $250,000 are protected if the bank fails. The trade-off is convenience: you cannot walk into a branch to deposit cash or speak to someone in person. Most online banks let you deposit checks by phone camera and transfer money electronically, which works for most people.

How rates change and what triggers a cut

The Federal Reserve sets a target range for the federal funds rate—the rate banks charge each other for overnight loans. Banks use this as a signal for what to pay depositors. When the Fed raises its rate, banks usually raise savings account rates within weeks or months. When the Fed cuts its rate, banks cut deposit rates much faster, sometimes within days.

Banks also cut rates when they have enough deposits and do not need to attract more customers. If a bank is flooded with new deposits, it may lower the rate because it does not need to compete for your money anymore. This is why rates tend to drop even if the Fed has not moved—the bank simply decided to pay less.

You can track the Fed's rate decisions on the Federal Reserve's website. The Fed typically meets eight times per year and announces changes on scheduled dates. Knowing when these meetings happen helps you predict when your bank might change its rate.

High-yield savings accounts versus regular savings accounts

A high-yield savings account (HYSA) is simply a savings account that pays a higher APY than the bank's standard savings account. There is no official definition—it is just a marketing term. Some banks call their 4.5% account a high-yield account while another bank calls its 4.5% account a regular savings account. The name does not matter; the APY does.

Most online banks offer only one type of savings account, and it pays the higher rate. Traditional banks often have a regular savings account (paying 0.01%) and a high-yield savings account (paying 0.5% to 1.5%), so you have to choose which one to open. If you are opening a savings account at a traditional bank, ask which account type pays the most interest.

Money market accounts are another option. They work like savings accounts but sometimes pay slightly higher rates and may offer check-writing or debit card access. The trade-off is that some money market accounts have higher minimum balances or charge fees if your balance drops below a threshold.

What happens to your interest if you withdraw money

Interest accrues daily at most banks, meaning you earn a tiny amount each day based on your current balance. If you withdraw money mid-month, you stop earning interest on that amount immediately. If you deposit money mid-month, you start earning interest on it right away (though some banks may have a one-day delay).

Some savings accounts have withdrawal limits or penalties for frequent withdrawals. Federal law used to cap savings account withdrawals at six per month, but that rule was suspended in 2020 and has not been reinstated. Most banks no longer enforce withdrawal limits, but a few still do. Check your account terms before opening to see if there are any restrictions.

If you withdraw your entire balance, the account may close automatically, especially if the bank has a minimum balance requirement. When an account closes, you stop earning interest. If you plan to withdraw everything, do it all at once rather than in multiple transactions.

Taxes on savings account interest

Interest you earn on a savings account is taxable income. At the end of each year, your bank sends you a Form 1099-INT showing how much interest you earned. You must report this on your tax return, even if the amount is small. If you earned more than $10 in interest during the year, the bank is required to send you the form.

The interest is taxed at your ordinary income tax rate, not at the capital gains rate. This means if you earn $500 in interest and you are in the 22% tax bracket, you owe roughly $110 in federal taxes on that interest. State taxes may apply as well, depending on where you live.

This is one reason high-yield savings accounts matter: earning 4.5% instead of 0.5% on $10,000 means $400 more in annual interest. Even after taxes, you come out significantly ahead. If you are in a high tax bracket, consider whether a tax-advantaged account like a Roth IRA might work better for your long-term savings.

Frequently Asked Questions

Can I lose money in a savings account?

No, you cannot lose your principal deposit in an FDIC-insured savings account. Your balance can only stay the same or grow. However, if inflation is higher than your interest rate, your money loses purchasing power—$10,000 earning 2% APY while inflation is 4% means you can buy less with that money next year.

Do I have to keep a minimum balance to earn interest?

Most online banks do not require a minimum balance to earn the stated APY. Some traditional banks require $500 or $1,000 minimum to earn interest, and may pay a lower rate if your balance drops below that. Always check the account terms before opening.

What if I move my money to a different bank?

You keep all the interest you earned up to the day you withdraw. The old bank sends you a 1099-INT for the interest earned while the money was there. The new bank starts paying interest on your new balance at its rate, and sends you a separate 1099-INT at year-end for interest earned there.

Is a savings account better than keeping money in checking?

Savings accounts earn interest; most checking accounts earn nothing or nearly nothing. If you have money you do not need to spend immediately, a savings account pays you to hold it. The trade-off is that savings accounts are meant for money you do not access frequently, while checking is for everyday spending.

How often does interest get added to my account?

Interest compounds and is credited to your account monthly or daily, depending on the bank. Daily compounding means you earn interest on your interest every single day, though the amount is tiny. Monthly compounding is more common and the difference in earnings is small unless your balance is very large.