Does My Savings Account Earn Interest?
Explore the fundamentals of savings account growth. Understand how your money earns, what impacts its value, and how to effectively monitor your returns.
A savings account is a financial product offered by banks and credit unions designed to hold your money securely. It provides a dedicated place to set aside funds, often for short-term goals or emergencies. Unlike a checking account used for daily transactions, a savings account’s primary purpose is to help your money grow over time. Most savings accounts offer interest, which is a payment from the financial institution for the use of your deposited funds.
Understanding Savings Account Interest
When you deposit money into a savings account, the financial institution essentially borrows those funds from you. In return for using your money, the bank pays you interest, which is a percentage of your deposit.
The standardized way to compare interest rates on savings accounts is through the Annual Percentage Yield (APY). APY reflects the total amount of interest earned on a deposit over a year, taking into account the effect of compounding interest. While an interest rate is the stated percentage, APY provides a more accurate picture of your actual earnings by including interest earned on previously accumulated interest.
Compounding interest occurs when the interest earned on your principal balance is added back to your account, and then future interest is calculated on this new, larger amount. This means your money earns interest on itself, leading to accelerated growth over time. Most savings accounts compound interest daily or monthly, which can significantly increase your total earnings, particularly over extended periods.
What Affects Your Interest Rate
Several factors influence the interest rate a financial institution offers on a savings account. The broader economic environment plays a significant role, with actions by the Federal Reserve often impacting rates. When the Federal Reserve raises its benchmark interest rates, savings account rates tend to rise, and conversely, they may fall when the Fed lowers rates.
The type of financial institution also affects the rates available. Online banks, for instance, often offer higher interest rates on savings accounts compared to traditional brick-and-mortar banks. This difference is due to online banks having lower operating costs, which allows them to pass those savings on to customers in the form of better rates.
Specific features of a savings account can also influence its interest rate. Some accounts might require a minimum balance to earn the advertised APY, or they may offer tiered interest rates where higher balances qualify for higher rates. Additionally, banks sometimes provide promotional or introductory rates for new accounts, which are higher for a limited period before reverting to a standard rate.
How to Verify Your Interest Earnings
Verifying the interest you have earned on your savings account involves reviewing your account statements. Financial institutions provide monthly or quarterly statements, either in paper form or accessible through online banking portals. These statements detail all transactions, including interest payments credited to your account.
Within your online banking platform or mobile application, you can find a section dedicated to transaction history or account activity. This feature allows you to view deposits, withdrawals, and interest postings. Many platforms also offer a summary of interest earned over specific periods, such as year-to-date.
If you have difficulty locating or understanding your interest earnings on statements or through online platforms, contacting your financial institution’s customer service department is a direct approach. Bank representatives can guide you through your account details and explain how interest is applied and reported. They can also provide clarification on any discrepancies you might observe.
Tax Implications of Interest Income
Interest earned on a savings account is considered taxable income by the Internal Revenue Service (IRS). This means that these earnings must be reported on your federal income tax return.
Financial institutions are required to issue Form 1099-INT to account holders who earn $10 or more in interest during a calendar year. Even if you do not receive a Form 1099-INT because your interest earnings are less than $10, the income is still taxable and should be reported.
You will report this interest income on Schedule B, Interest and Ordinary Dividends, when filing your federal tax return. Depending on your state’s tax laws, this income may also be subject to state income taxes. Maintain accurate records of your Form 1099-INT statements for tax reporting.