A Roth IRA can increase its value over time by raising interest rates. Whenever investments yield interest or dividends, that amount is added to the account balance. Account holders can then earn interest on the additional interest and dividends, a process that can be continued over and over again. IRAs have historically achieved average annual returns of 7 to 10%.
Your earnings increase when you invest your IRA contributions and investment income in interest and dividend income opportunities such as stocks, mutual funds, bonds, exchange-traded funds, and certificates of deposit. IRAs grow through compounding, which makes your money grow regardless of whether you contribute or not. Put simply, Roth IRAs don’t pay an interest rate. A Roth IRA is like a shopping cart, it’s basically an empty basket until you fill it up.
But with a Roth, you fill that basket with investments, not Cheerios. Either way, you’ll earn a return, which is sometimes expressed as interest, when you invest your money in your Roth IRA for a specific investment. These interest rates usually vary, but the goal is to take advantage of interest accrual, which reinvests any return you earn to continue to grow your money over time. Learn more about how a Roth IRA earns interest and whether it’s a good saving and investment strategy for you.
Investing in a Roth IRA saves you the hassle of paying taxes in retirement and allows you to choose your investments to hopefully maximize your Roth IRA returns. The idea that a Roth IRA is just a vessel for your investments doesn’t mean that all Roth IRAs are the same. The most important determinants of your interest rate, in this case defined as the overall annual growth you see in your Roth IRA portfolio, include any published interest rates for your money market accounts or CDs in your IRA. While individual investments within the Roth IRA can raise interest rates at different interest rates, you can usually calculate the annual return on a Roth IRA using tools provided by the company that holds your IRA and see how interest rates have increased.
So how do you decide on the best investments in your Roth IRA to maximize your interest rate? Unlike a savings account, money market account, or certificate of deposit (CD), it takes more than looking around to find a competitive rate to get the best interest rate from your Roth IRA. In addition to the growth difference shown in the chart above, note that the Roth IRA invested in a diversified portfolio exceeds uninvested cash by four times. You’ll make the most of the Roth IRA tax benefits if you decide to invest. A Roth IRA can be an excellent way to set aside money for retirement, but knowing how to grow your money in a Roth IRA can be confusing. Roth IRAs are also subject to income restrictions. Therefore, check whether your income is too high to contribute that much to a Roth IRA.