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

A high yield savings account pays you interest on the money you deposit. The amount you earn is determined by two things: the annual percentage yield (APY) the bank offers, and how much money you keep in the account. Banks currently offer APY rates ranging from roughly 4% to 5.35%, though this changes as the Federal Reserve adjusts its benchmark rate. The higher the APY, the more you earn on the same balance.

Interest compounds daily or monthly depending on the bank, meaning you earn interest on your interest. If you deposit $10,000 at 5% APY compounded daily, you earn roughly $512 in the first year—not $500, because the daily compounding adds small amounts throughout the year. The exact figure varies by bank and how they calculate compounding.

Your earnings stop growing if you withdraw money. If you pull out $5,000 mid-year, you only earn interest on the remaining $5,000 for the rest of that year. Some accounts charge fees for excessive withdrawals, which reduces your net earnings.

Key Takeaways

  • High yield savings accounts currently pay between 4% and 5.35% APY, though rates change when the Federal Reserve adjusts its benchmark rate.
  • Your actual earnings equal the APY multiplied by your account balance, compounded daily or monthly depending on the bank.
  • A $10,000 deposit at 5% APY earns roughly $512 in one year because of daily compounding, not a flat $500.
  • Withdrawals reduce your balance and therefore reduce the interest you earn for the remainder of that period.
  • Banks can lower their APY at any time, so the rate you see today may not be the rate you earn six months from now.

How to calculate what you'll earn

Use this formula: (Balance × APY) ÷ 365 × number of days the money sits in the account. If you deposit $5,000 at 4.5% APY and leave it untouched for 90 days, you earn roughly $55. For a full year with no withdrawals, that same $5,000 earns $225.

Most banks provide an interest calculator on their website where you enter your deposit amount and see the projected earnings. These calculators assume the rate stays the same for the full year, which is not may provide. Use them to compare banks, not to lock in a prediction.

If you make regular deposits—say, $500 per month—your earnings compound on a growing balance. After 12 months of $500 monthly deposits at 5% APY, you will have deposited $6,000 and earned roughly $150 in interest, because each deposit earns for a different length of time.

Why rates change and what that means for your money

Banks set their APY based on what the Federal Reserve charges them to borrow money. When the Fed raises its benchmark rate, banks can afford to pay you more. When the Fed lowers rates, banks lower what they pay you. The Fed has raised rates significantly since 2022, which is why high yield savings accounts now pay 4% to 5.35%—much higher than the 0.01% many paid in 2021.

Your bank can lower your rate at any time without your permission. They must notify you before the change takes effect, usually by email or through your online account. If your rate drops and you want to keep earning more, you can move your money to a different bank offering a higher rate. There is no penalty for withdrawing from a savings account.

Rates are expected to fall over the next year or two as the Fed adjusts its policy, which means the 5.35% you see today may drop to 4% or lower by next year. Lock in the highest rate you can find now if you plan to keep money in savings for the long term.

High yield savings versus money market accounts and CDs

High yield savings accounts offer flexibility: you can withdraw money whenever you need it without penalty. Money market accounts work similarly but often require a higher minimum balance and may limit how many withdrawals you make per month. Both typically pay similar APY rates, currently in the 4% to 5.35% range.

Certificates of deposit (CDs) often pay slightly higher rates—sometimes 5.5% or more—but lock your money away for a set term, usually three months to five years. If you withdraw early, you pay a penalty that can wipe out most or all of your interest earnings. Choose a CD only if you know you will not need the money before the term ends.

Money market funds and regular savings accounts pay much less—often under 0.5% APY. They are not worth using if you have access to a high yield savings account.

Where to find the highest rates

Online banks typically offer the highest APY because they have lower overhead costs than brick-and-mortar banks. Banks like Marcus, Ally, American Express Personal Savings, and Wealthfront currently offer rates at or near the top of the market, though this changes monthly. Check comparison sites like Bankrate or DepositAccounts to see current rates across multiple banks.

Credit unions sometimes offer competitive rates, though many pay less than online banks. Call your credit union and ask what APY they offer on savings accounts. Traditional banks like Chase and Bank of America typically pay under 0.5% APY on savings, which is why they are not worth using for this purpose.

When comparing banks, look at the APY, not just the interest rate. APY includes the effect of compounding and shows you the true annual return. Also check whether the bank charges monthly fees, which reduce your net earnings.

Tax implications of interest earnings

Interest you earn in a high yield savings account is taxable income. At the end of each year, your bank sends you a 1099-INT form showing how much interest you earned. You report this on your tax return and pay income tax on it at your regular tax rate.

If you earned $500 in interest and you are in the 24% tax bracket, you owe roughly $120 in federal income tax on that interest. This is why high yield savings is best for money you do not need to invest for growth—the interest is modest enough that the tax burden is manageable, but high enough to beat inflation.

Some states tax interest income and some do not. Check your state's tax rules or ask a tax professional if you are unsure.

How much you need to deposit to make it worthwhile

There is no minimum deposit required to open most high yield savings accounts, though some banks ask for $1 or $25 to start. The real question is how much you need to deposit for the interest to matter to you.

At 5% APY, a $1,000 deposit earns $50 per year. A $10,000 deposit earns $500 per year. A $100,000 deposit earns $5,000 per year. If you have less than $1,000 in savings, the interest earnings will be small, but there is no downside to opening an account—you earn more than you would in a regular savings account, and your money is still accessible if you need it.

High yield savings makes the most sense for an emergency fund (three to six months of expenses) or money you plan to use within the next year or two. For money you will not touch for five or more years, a CD or investment account may earn you more.

Frequently Asked Questions

Can the bank take away my interest or lower my rate without warning?

The bank can lower your rate at any time, but they must notify you first—usually by email or through your online account. They cannot take away interest you have already earned. If your rate drops, you can move your money to a different bank with a higher rate at no penalty.

Is my money safe in a high yield savings account?

Yes, as long as the bank is FDIC-insured. The FDIC protects up to $250,000 per account holder per bank. If the bank fails, the FDIC returns your money plus any interest you earned up to that point. Check the bank's website or call to confirm they are FDIC-insured.

What happens if I withdraw money before the year ends?

You earn interest only on the money that stays in the account. If you deposit $10,000 and withdraw $3,000 after six months, you earn interest on $10,000 for six months, then on $7,000 for the remaining six months. There is no penalty for withdrawing from a savings account.

How often is interest added to my account?

Most banks add interest monthly or daily. Daily compounding means you earn slightly more because interest is calculated and added every day. The difference is small but real—daily compounding at 5% earns roughly $512 on $10,000 per year, while monthly compounding earns roughly $511.

Should I move my money if rates drop?

If your bank's rate drops significantly below what other banks offer, moving your money takes about a week and costs nothing. However, if the rate drop is small (less than 0.25%), the hassle may not be worth it. Check rates monthly and move your money when you find a bank paying at least 0.5% more.