How Much Interest Do Banks Pay on 1 Million?

Earning interest on a significant sum, such as $1 million, involves understanding various financial vehicles and economic forces. While the prospect of substantial earnings is appealing, the actual amount banks pay depends on numerous factors. Maximizing interest income on a large deposit requires careful consideration of account types, prevailing market conditions, and personal financial goals.

Factors Influencing Interest Rates

Interest rates offered by banks on deposits are shaped by a combination of macroeconomic trends and specific banking considerations. The Federal Reserve’s monetary policy plays a central role, as it influences the federal funds rate, which is the benchmark for interbank lending. When the Federal Reserve raises this rate, banks typically increase their own interest rates on deposits and loans, and conversely, a decrease in the federal funds rate generally leads to lower deposit rates. As of July 30, 2025, the Federal Reserve maintained the federal funds rate at a range of 4.25% to 4.50%.

Inflation also significantly impacts interest rates. When inflation is high, the purchasing power of money decreases over time, leading banks to offer higher interest rates to attract and retain deposits. This helps compensate depositors for the erosion of their money’s value. Economic growth further influences rates; a strong economy often leads to higher interest rates as demand for credit increases, prompting banks to offer more attractive rates to fund lending activities. Conversely, during economic slowdowns, interest rates tend to decrease to stimulate borrowing and investment.

Beyond these broader economic factors, individual bank characteristics also affect the rates they offer. Larger, established banks may offer lower rates due to their extensive customer base and lower need to attract deposits. Smaller or online-only banks often provide more competitive rates to attract new customers and grow their deposit base. A bank’s liquidity needs also influence rates; those needing more funds may offer higher rates to attract deposits quickly. Competition among financial institutions for deposits can also drive rates higher, as banks vie for market share.

Deposit Account Types

Several types of bank accounts and financial instruments are suitable for holding a $1 million deposit, each offering different features and potential interest rates. Traditional savings accounts provide liquidity but typically offer very low interest rates, often below 1.00% annual percentage yield (APY). While simple to open and manage, they are generally not designed for maximizing returns on large sums.

High-yield savings accounts offer significantly higher interest rates than traditional savings accounts, sometimes 10 to 20 times the national average. These accounts are often found at online banks, which have lower overhead costs, allowing them to pass on higher rates to depositors. While rates on high-yield savings accounts are variable and can change with market conditions, they provide flexibility for accessing funds without penalty.

Money market accounts blend features of savings and checking accounts, often providing competitive interest rates and limited check-writing or debit card access. They generally offer higher rates than traditional savings accounts. Money market accounts may have higher minimum balance requirements compared to standard savings accounts, and some may limit the number of monthly transactions.

Certificates of Deposit (CDs) offer fixed interest rates for a specified term, ranging from a few months to several years. In exchange for locking up funds for a set period, CDs typically provide higher rates than savings or money market accounts, especially for longer terms. Early withdrawals from CDs usually incur a penalty, which can reduce the interest earned or even the principal. For a $1 million deposit, CD rates vary widely based on term, with examples like 5.00% APY for a 1-year CD and 4.00% APY for a 5-year CD.

Brokered CDs are offered through brokerage firms, rather than directly from a bank, and can sometimes provide higher interest rates. These CDs allow investors to access a wider range of issuing banks and potentially stack multiple CDs from different institutions to manage FDIC insurance limits. While brokered CDs offer flexibility in terms of potential sale on a secondary market before maturity, the sale price can be influenced by market conditions, possibly resulting in an amount below the original investment.

Important Considerations for Large Deposits

When depositing a substantial sum like $1 million, understanding protective measures and tax implications becomes essential. The Federal Deposit Insurance Corporation (FDIC) insures deposits at member banks, protecting account holders in the event of a bank failure. The standard FDIC insurance limit is $250,000 per depositor, per FDIC-insured bank, for each ownership category. This means that a $1 million deposit would need to be spread across multiple banks or different ownership categories within a single bank to be fully insured. For instance, a depositor could have $250,000 in a single account at four different FDIC-insured banks to ensure full coverage. Joint accounts, for example, are insured up to $500,000 for two co-owners at one institution.

Interest income earned on bank deposits is generally considered taxable income by the Internal Revenue Service (IRS). This income is typically taxed at your ordinary income tax rate, which ranges from 10% to 37% as of 2023, depending on your overall income level and filing status. Financial institutions are required to report interest income of $10 or more to both the taxpayer and the IRS on Form 1099-INT by January 31 each year. All taxable interest income must be reported on your federal income tax return.

The Annual Percentage Yield (APY) is a standardized measure used to compare the earning potential of different interest-bearing accounts. APY reflects the total amount of interest earned on a deposit account over one year, taking into account the effect of compounding interest. Compounding means that interest is earned not only on the initial principal but also on the accumulated interest, allowing the balance to grow faster over time. A higher APY indicates a greater return on the deposit over a year.