Do You Get Interest in a Savings Account?
Learn the essentials of savings account interest: how your money grows, what impacts its rate, and how your deposits remain secure.
Savings accounts typically earn interest, allowing your money to grow over time simply by keeping funds deposited with a financial institution. A savings account is a deposit account held at a bank or other financial institution that allows you to store your money securely while earning a return. The primary benefit is that your money can increase in value, making your funds work for you.
How Interest Accumulates in Savings Accounts
Interest is the amount a bank pays you for depositing your money with them. When comparing savings accounts, the Annual Percentage Yield (APY) is the most accurate metric. APY represents the total amount you can earn on your savings over one year, including compounding interest. This standardized rate allows for clear comparison across different accounts.
Compounding is the process where interest is earned on your initial deposit, known as the principal, and on accumulated interest from previous periods. This means your earnings are reinvested, and future interest is calculated on a continuously growing balance. Banks typically compound interest daily, monthly, or quarterly, with more frequent compounding leading to faster growth. Interest is often determined based on the average daily balance or the lowest balance held within a given period.
What Influences Your Savings Account Interest
Several factors contribute to varying interest rates on savings accounts. Broader economic conditions and central bank monetary policy, such as the Federal Reserve’s actions, significantly influence general interest rates. When the Federal Reserve adjusts the federal funds rate, it impacts the rates banks offer depositors.
Bank policies and business models also play a considerable role in determining available rates. Online-only banks often provide higher APYs compared to traditional institutions. This is largely due to lower operating costs, as online banks do not incur expenses for physical branch networks. Different account types, such as “high-yield” savings accounts, offer more competitive rates than standard options.
Furthermore, individual account features can affect the interest earned. Some accounts offer tiered interest rates, where higher balances qualify for a greater yield. Certain accounts may also have minimum balance requirements to earn interest.
Tax Implications of Savings Account Interest
Interest earned on savings accounts is generally considered taxable income by the IRS. This income is subject to federal and, in some cases, state income tax, similar to other ordinary income. You are responsible for reporting this income on your annual tax return.
Financial institutions are required to report interest payments to the IRS and account holder if total interest earned is $10 or more in a calendar year. This is done using Form 1099-INT, typically issued by January 31st. Even if you earn less than $10 and do not receive a Form 1099-INT, the income is still taxable and should be reported.
Safeguarding Your Savings Account Funds
Your money in a savings account is protected by robust federal insurance, making it a low-risk place to keep your funds. The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that insures deposits at member banks. This insurance protects your money if a bank fails.
FDIC insurance covers deposits up to $250,000 per depositor, per insured bank, for each account ownership category. This means that separate coverage limits apply to different account types, such as individual, joint, and certain retirement accounts, even at the same institution. To verify if a bank is FDIC-insured, look for the official FDIC sign, check their website, or use the FDIC’s online BankFind tool.