How Much Interest Does $1 Million Make?

Earning interest on a substantial sum like $1 million presents a significant opportunity for generating income. The actual amount of interest earned is not a fixed figure, however, as it depends on a combination of factors, including the type of investment chosen and prevailing economic conditions. Understanding how interest is calculated and the various investment avenues available can help clarify the potential income that such a principal might generate.

Understanding Interest Calculation

Interest calculation fundamentally determines how an initial sum of money grows over time. Two primary methods govern this growth: simple interest and compound interest. Simple interest is calculated solely on the original principal amount. For instance, if $1 million earns a 3% simple interest rate annually, it would generate $30,000 in interest each year ($1,000,000 0.03 = $30,000). The principal remains constant for this calculation.

In contrast, compound interest involves calculating interest on the initial principal and also on the accumulated interest from previous periods. This creates an accelerating growth effect. If $1 million earns a 3% annual compound interest rate, it would yield $30,000 in the first year. In the second year, the 3% interest would be calculated on $1,030,000, resulting in $30,900 for that year. Over five years, the initial $1 million at 3% compounded annually would grow to approximately $1,159,274, illustrating how compounding significantly enhances returns.

The frequency of compounding also plays a role in the total interest earned. Interest can compound daily, monthly, quarterly, or annually. More frequent compounding leads to slightly higher returns because the interest is added to the principal more often, allowing subsequent interest calculations to be based on a larger sum. For example, an account that compounds interest daily will generally yield a marginally higher return than one that compounds annually, even if both offer the same stated annual interest rate.

Interest Rates Across Investment Types

Various investment vehicles offer different interest rates, each with distinct characteristics regarding risk, liquidity, and accessibility. High-yield savings accounts, for example, are highly liquid and offer easy access to funds, with current annual percentage yields (APYs) ranging from approximately 4.35% to 5.00%. Keeping $1 million in such an account could generate between $43,500 and $50,000 in annual interest.

Certificates of Deposit (CDs) provide a fixed interest rate for a predetermined period, known as the term. Current 1-year CD rates can reach up to 4.50% APY, while 5-year CDs might offer around 4.00% to 4.28% APY. A $1 million investment in a 1-year CD at 4.50% would yield $45,000, whereas a 5-year CD at 4.28% would produce $42,800 in annual interest. Early withdrawal from a CD typically incurs a penalty, making them less liquid than savings accounts.

Money market accounts blend features of savings and checking accounts, offering variable interest rates and often limited check-writing privileges. Current money market account APYs typically fall within the range of 4.32% to 5.00%. Placing $1 million in a money market account earning 4.50% APY could result in $45,000 in annual interest, though rates can fluctuate with market conditions.

Bonds represent debt instruments issued by governments or corporations to raise capital, paying interest through regular coupon payments. U.S. Treasury bonds, considered to have minimal default risk, currently offer yields around 4.34% for a 10-year bond and approximately 4.94% for a 30-year bond. A $1 million investment in a 10-year Treasury bond yielding 4.34% would provide $43,400 in annual interest.

Corporate bonds, issued by companies, carry higher risk than Treasury bonds but typically offer higher yields to compensate investors. Investment-grade corporate bonds, such as those rated AAA, currently yield around 5.36%, while A-rated corporate bonds yield about 4.83%. An investment of $1 million in a AAA-rated corporate bond yielding 5.36% could generate $53,600 in annual interest.

Factors Affecting Net Interest

While headline interest rates indicate potential earnings, several external factors can significantly reduce the actual net interest received by an investor. Inflation is one such factor, representing the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. If an investment yields 3% interest but the annual inflation rate is 2.7%, the real return on that investment, adjusted for inflation, is substantially lower than the nominal interest rate. This erosion of purchasing power means that the interest earned buys less over time.

Taxes also play a considerable role in diminishing net interest income. Interest earned from most investment vehicles is subject to federal income tax, and potentially state and local taxes, as ordinary income. The specific tax rate applied depends on an individual’s total taxable income and their filing status. For example, in 2025, federal income tax brackets range from 10% to 37%. If a single filer’s taxable income, including interest from a $1 million investment, places them in the 24% federal tax bracket, a gross annual interest of $50,000 would see $12,000 ($50,000 0.24) deducted for federal taxes, reducing the net interest to $38,000 before any state or local taxes. Municipal bond interest is often exempt from federal, and sometimes state and local, taxes.

Beyond inflation and taxes, various fees associated with investment products or financial advisory services can also reduce net returns. Financial advisors often charge fees as a percentage of assets under management (AUM), typically ranging from 0.25% to 1.65% annually. For a $1 million portfolio, a median fee might be around 1.02%. This means an annual deduction of approximately $10,200 ($1,000,000 0.0102), directly impacting the overall income generated from the interest. These fees, along with potential product-specific charges, must be considered when calculating the true net interest income.

Illustrative Scenarios for Income Potential

Understanding how much annual income $1 million can generate requires considering a blend of investment choices, expected returns, and the impact of inflation and taxes.

A conservative approach, prioritizing safety and liquidity, might involve placing funds in high-yield savings accounts and short-term Certificates of Deposit (CDs). With an average interest rate of 4.50% from these low-risk options, $1 million would yield $45,000 in gross annual interest. After accounting for a 2.7% inflation rate, the purchasing power of this income would be reduced. If the investor is in a 24% federal income tax bracket, approximately $10,800 ($45,000 0.24) would be allocated to taxes, leaving a net annual income of $34,200 before any potential advisory fees.

A moderate approach could involve a diversified mix, combining high-yield savings and CDs with a portion allocated to investment-grade corporate bonds and U.S. Treasury bonds. This strategy might aim for an average interest rate of around 4.80%. On $1 million, this would generate $48,000 in gross annual interest. Applying the same 2.7% inflation rate and a 24% federal income tax bracket, the tax liability would be $11,520 ($48,000 0.24), resulting in a net annual income of $36,480. This scenario accepts a slightly higher level of risk for potentially greater returns compared to the conservative strategy.

An income-focused strategy might lean more heavily into higher-yielding investment-grade corporate bonds and potentially some longer-term Treasury bonds, aiming for an average interest rate of 5.00%. This would produce $50,000 in gross annual interest on $1 million. After considering inflation at 2.7% and a 24% federal income tax rate, the tax deduction would be $12,000 ($50,000 0.24), leaving a net annual income of $38,000. These illustrative scenarios demonstrate how investment choices and economic factors collectively determine the tangible income available from a $1 million principal.