Most savings accounts do earn interest, but the amount varies widely depending on the bank and the account type
A savings account at a traditional bank typically earns interest on the money you deposit. The bank pays you a percentage of your balance each month or year in exchange for keeping your money there. However, the rate you receive depends on several factors: whether your bank is a traditional brick-and-mortar institution, an online bank, or a credit union; the current interest rate environment set by the Federal Reserve; and the specific account you choose.
Not all savings accounts earn the same rate. A traditional bank branch might offer 0.01% annual percentage yield (APY), while an online bank might offer 4.5% or higher. The difference between these two accounts is substantial over time. On a $10,000 balance, 0.01% APY earns $1 per year, while 4.5% APY earns $450 per year.
Some savings products, like money market accounts or high-yield savings accounts, typically pay higher rates than basic savings accounts at the same institution. Certificates of deposit (CDs) often pay even more, but require you to lock your money away for a set period.
Key Takeaways
- Most savings accounts earn interest, but rates range from nearly zero at large banks to over 4% at online banks and credit unions.
- The interest rate your account earns depends on the type of institution, the specific account product, and current Federal Reserve policy.
- Interest compounds monthly or daily at most banks, meaning you earn interest on your interest, which grows your balance faster over time.
- You can find your account's current APY on your bank's website, in your account agreement, or by calling customer service.
- Switching to a higher-rate account can significantly increase your earnings without changing how much you save.
How interest rates are set and why they change
The Federal Reserve influences interest rates across the entire banking system. When the Fed raises its benchmark rate, banks typically raise the rates they pay on savings accounts. When the Fed lowers rates, savings account rates usually fall as well. This means the rate you earn today may be different six months from now.
Individual banks also set their own rates based on how much money they need to attract and how much they can earn by lending that money out. A bank that needs deposits urgently may offer a higher rate to draw customers. A bank with plenty of deposits may lower its rate because it doesn't need to compete as hard.
Online banks often pay higher rates than traditional banks because they have lower overhead costs—no physical branches to maintain, fewer employees, lower rent. They pass some of those savings to customers through higher interest rates.
Understanding APY versus interest rate
Banks advertise two related but different numbers: the interest rate and the annual percentage yield (APY). The interest rate is the percentage the bank pays on your balance. The APY includes the effect of compounding—earning interest on your interest.
If your account earns 4% APY compounded daily, you don't wait a full year to earn that 4%. Instead, the bank calculates interest daily and adds it to your account. That new interest then earns interest itself. Over a full year, the compounding effect means you earn slightly more than 4% of your original balance.
For savings accounts, the difference between the stated rate and the APY is usually small, but it matters more on larger balances and higher rates. Always look at the APY when comparing accounts, because that's the actual return you'll receive.
Where to find your account's current interest rate
Your bank must disclose your account's APY in the account agreement you received when you opened it. You can also find it on your bank's website, usually in the savings products section. Log into your online banking portal and look for account details or disclosures.
If you can't find it online, call your bank's customer service line. They can tell you the current APY on your specific account. Keep in mind that the rate may have changed since you opened the account, especially if you've had it for several years.
Your monthly or quarterly bank statement may also show the interest you earned that period, though it won't always show the APY clearly. The statement shows the actual dollars and cents you received, which you can use to calculate the rate if needed.
How different account types compare
| Account Type | Typical Rate Range | When Interest Compounds | Access to Money |
|---|---|---|---|
| Basic savings account | 0.01% to 0.5% | Monthly or daily | Anytime |
| High-yield savings account | 4% to 5% | Daily | Anytime |
| Money market account | 3.5% to 5% | Daily or monthly | Limited withdrawals per month |
| Certificate of deposit (CD) | 4% to 5.5% | Daily or monthly | Only at maturity; early withdrawal penalty applies |
The rates shown above reflect current market conditions but change frequently. A high-yield savings account at an online bank typically pays the most interest with no restrictions on when you can withdraw. A CD pays more than a savings account but locks your money for a set term—usually three months to five years.
Money market accounts sit between basic savings and CDs. They often pay higher rates than regular savings accounts but may limit how many times you can withdraw per month. Some also require a higher minimum balance to earn the advertised rate.
What happens to your interest if you withdraw money
Interest accrues on your balance each day, but you only receive it if you keep the money in the account through the end of the compounding period. If you deposit $5,000 and withdraw it after two weeks, you'll earn interest only on those two weeks of deposits, not the full month or year.
Some accounts charge a penalty if you make too many withdrawals in a month. Federal rules once limited savings account withdrawals to six per month, but that rule was suspended. However, individual banks may still enforce their own withdrawal limits or charge fees for excess withdrawals.
If you think you'll need to access your money frequently, a high-yield savings account is better than a CD. You earn nearly as much interest but can withdraw anytime without penalty.
How to compare interest rates across banks
Start by checking what your current bank pays. Visit their website or call and ask for the APY on their savings products. Write down the rate and the account type.
Then search online for "high-yield savings accounts" or "savings account rates." Websites like Bankrate, DepositAccounts, and the Federal Deposit Insurance Corporation (FDIC) list current rates from multiple banks. You can sort by rate to see which banks pay the most.
When comparing, look at three things: the APY, whether there's a minimum balance requirement, and whether the bank is FDIC-insured. FDIC insurance protects your deposits up to $250,000 per account at each bank, so you want that protection.
Opening a new account at a higher-rate bank takes 10 to 15 minutes online. You'll need your Social Security number, a government ID, and your current bank account information if you want to transfer money electronically. There's no cost to open a savings account.
Frequently Asked Questions
Do I have to pay taxes on savings account interest?
Yes. Interest earned on a savings account is taxable income. Your bank will send you a Form 1099-INT at the end of the year if you earned $10 or more in interest. You report this on your tax return. The amount you owe in taxes depends on your tax bracket and total income.
Can a savings account have negative interest?
In the United States, savings accounts do not have negative interest rates. However, some accounts charge monthly maintenance fees that can eat into your balance if you don't meet minimum requirements. Avoid accounts with high fees by choosing banks that don't charge them or by maintaining the minimum balance.
What's the difference between a savings account and a money market account?
A money market account typically pays higher interest than a savings account but may limit withdrawals to a certain number per month. Some money market accounts also come with a debit card or checkbook. Both are FDIC-insured up to $250,000.
Will my interest rate stay the same forever?
No. Banks can change savings account rates at any time, usually in response to Federal Reserve decisions. Your rate may go up or down. You can switch to a different bank if your current bank's rate becomes uncompetitive.
How much interest will I earn on $1,000?
It depends on the APY and how long you keep the money in the account. At 0.01% APY, you'd earn about 10 cents per year. At 4.5% APY, you'd earn about $45 per year. Use your bank's interest calculator or multiply your balance by the APY to estimate your earnings.