Money market accounts earn interest, but the rate changes based on what the bank offers and what the Federal Reserve does

The amount you earn depends on two things: the annual percentage yield (APY) the bank is currently paying, and how much money you keep in the account. A bank might pay 4.50% APY one month and 4.25% the next. The rate is not locked in—it moves up and down, usually following changes the Federal Reserve makes to its benchmark interest rate.

Right now, money market accounts at different banks pay different rates. Some online banks pay higher rates than brick-and-mortar banks. A bank with a 4.75% APY will earn you more than one paying 3.50% APY on the same balance, but both rates can change without warning. The bank is required to tell you when it changes, but you have to read the notice or check your statements to know it happened.

The actual dollars you earn depend on your balance and how long the money sits there. If you have $10,000 earning 4.50% APY for a full year, you earn about $450 in interest. If you have $5,000 at the same rate, you earn about $225. If you withdraw money partway through the year, you earn less because the balance was lower for part of that time.

Key Takeaways

  • The APY a bank pays on a money market account changes regularly and is not may provide to stay the same.
  • Different banks pay different rates at the same moment, so comparing rates across banks can mean earning hundreds of dollars more per year on the same balance.
  • Your actual earnings are calculated by multiplying your balance by the APY and dividing by 12 for each month, so withdrawals lower what you earn that year.
  • Banks must notify you when the rate changes, but you have to watch for the notice—the bank will not call you.

How banks decide what rate to pay

Banks set their money market rates based on what the Federal Reserve does with its benchmark rate, called the federal funds rate. When the Fed raises rates, banks usually raise what they pay on savings products. When the Fed cuts rates, banks usually cut what they pay. But banks do not move at the same speed or by the same amount—some lag behind, and some cut faster than others.

Banks also look at how much competition they face. An online bank with low overhead costs can afford to pay more than a branch bank with hundreds of locations. A bank trying to attract new customers might pay a higher rate than one that is not actively recruiting. A bank that already has plenty of deposits might pay less because it does not need to attract more money right now.

Why rates vary so much between banks

On the same day, one bank might pay 4.75% APY and another might pay 3.00% APY on a money market account. The difference is not a mistake—it reflects how each bank operates and what it needs. Online banks typically pay more because they have fewer expenses. Banks owned by larger financial institutions sometimes pay less because they can move money between their own accounts without needing to attract deposits from the public.

Some banks also use promotional rates. They might pay 5.00% APY for the first three months to bring in new customers, then drop to 4.00% after that. The promotional period is always disclosed in the account terms, but you have to read them to know when the higher rate expires.

How interest compounds and when you see it

Money market accounts compound interest daily, which means the bank calculates what you owe based on your balance each day, then adds that small amount to your account. The next day, interest is calculated on the new, slightly higher balance. Over time, this compounds into more earnings than if interest were calculated once a year.

You see the interest hit your account monthly. Most banks deposit it on the last day of the month or the first day of the next month. You can withdraw it like any other money, or leave it in the account to earn interest on top of the interest you already earned.

What happens when the Federal Reserve changes rates

The Federal Reserve meets eight times a year to decide whether to raise, lower, or hold its benchmark rate steady. When it raises rates, banks usually raise what they pay on savings products within days or weeks. When it cuts rates, banks usually cut what they pay, sometimes immediately.

The lag between a Fed move and a bank's response varies. Some banks move within a day. Others wait weeks. A few wait months. This is why you might see a money market rate stay the same even after the Fed has moved, or why it might drop before you expected it to. The bank is not required to move at any particular speed—only to disclose the change when it happens.

Comparing rates across banks to maximize your earnings

Because rates vary so much, the bank you choose matters. Putting $25,000 in an account paying 4.75% instead of 3.50% earns you about $312 more per year on the same balance. Over five years, that difference grows to over $1,500 before compounding is factored in.

You can compare current rates on financial websites that track them, or by visiting banks' websites directly. Look for the APY, not just the interest rate—APY includes the effect of compounding and is the true number to compare. Also check whether there are any fees that reduce your earnings, such as monthly maintenance fees or fees for falling below a minimum balance.

Fees that reduce what you actually earn

A high APY does not mean much if the bank charges fees that eat into your earnings. Some money market accounts charge a monthly maintenance fee of $5 to $15. Others charge a fee if your balance drops below a minimum, such as $2,500 or $10,000. A few charge a fee for each withdrawal or transfer beyond a certain number per month.

These fees come out of your account balance, which means they reduce both the money you have and the interest you earn on it. A $10 monthly fee on a $10,000 account earning 4.50% APY costs you $120 per year, which is more than a quarter of your annual interest. Always read the fee schedule before opening an account.

Frequently Asked Questions

Can I lock in a rate so it does not go down?

No. Money market accounts have variable rates, which means the bank can change the rate at any time. If you want a locked-in rate, you would need a certificate of deposit (CD), which fixes the rate for a set period like six months or one year. The tradeoff is that you cannot withdraw the money without a penalty.

Is the interest I earn taxed?

Yes. Interest earned on a money market account is taxable income. The bank will send you a 1099-INT form at the end of the year showing how much interest you earned, and you report that on your tax return. The amount you owe in taxes depends on your overall income and tax bracket.

What if I withdraw money before the end of the year?

You still earn interest on the money while it was in the account. Interest is calculated daily based on your balance each day, so if you withdraw $5,000 on June 15, you earn interest on the full balance through June 14 and on the lower balance from June 15 onward. There is no penalty for withdrawing—money market accounts are liquid accounts.

How often do banks change their rates?

Banks can change rates whenever they want, but most change them when the Federal Reserve moves or when market conditions shift. During periods when the Fed is actively raising or cutting rates, some banks change monthly or even more often. During stable periods, rates might stay the same for months.

Should I move my money to a bank with a higher rate?

It depends on how much money you have and how much the rate difference is. If you have $50,000 and can move it to a bank paying 1% more APY, you earn $500 more per year. If you have $2,000, the difference is $20 per year. You also have to consider whether the new bank has fees, whether it is FDIC insured, and whether you trust the bank's customer service.