The average growth in an individual retirement arrangement (IRA) depends on various factors, including the type of underlying investments, the average return rate over time and the total contributions. However, until you begin withdrawing money from them, taxes are not a factor for traditional IRAs because they hold tax-deferred investments.
Consider Also: What Type of IRA Do I Have?
Average Rate of Return on Traditional IRA
Traditional IRAs do earn interest, but the rate varies widely. According to the Standard & Poor's 500® (S&P), the average percent an IRA grows each year is 10.8 percent. This rate is based on data collected from Jan. 1, 1971 to Dec. 31, 2020.
However, the average earning in IRAs of the traditional variety will also be influenced by the factors included below.
Traditional IRA Underlying Investments
The U.S. government restricts the kind of investments you can have within your traditional IRA. For example, tangible assets, such as most precious metals, artwork, antiques and jewelry are not allowed. Also, you cannot use your IRA funds to buy life insurance.
However, you may be able to invest in certain types of gold and silver coins. You can also use your funds to buy nontangible assets, such as stocks, bonds, exchange-traded funds (ETFs) and unit investment trusts (UITs).
Stocks tend to perform very well over time, but they can also perform poorly sometimes. Throughout the past 140 years, the average 10-year stock market return rate has been 9.2 percent. On the other hand, the S&P index has managed a 13.6 percent annual return. For this reason, stocks are a worthwhile investment, especially over a longer period.
If you want to enjoy higher stock market returns, though, you need to choose the right company. Also, ensure you invest early on in the life of a company when the stock value is low.
Bonds are also another option worth considering and have return rates of between 5 and 6 percent – lower than that of stocks. However, they are more stable. Thus, over time, they pose a lower financial risk and will still perform even when the market conditions are horrible.
Prevailing Market Conditions
The prevailing market conditions, such as political stability and leadership, usually significantly affect the average return rate of traditional retirement accounts.
COVID-19 has now proven that global pandemics can also affect market conditions significantly. The global economy shrunk by 4.4 percent in 2020, severely impacting the market conditions by causing recession across the world. As a result, many investments lost some of their value.
Total IRA Contributions
The total contributions in your traditional IRA also affect the average return rate since it is compounded over time. Therefore, the less money you invest, the slower your wealth will grow over time.
For example, since the government allowed qualified investors to withdraw up to $100,000 from their retirement accounts without incurring penalties, those that did will probably end up with less growth than those that didn’t.
Current IRA Interest Rates
The current interest rate for an IRA will depend on what investment you want and the platform through which you buy it.
For example, if you have invested in 100 percent stocks, you may net the average rate of 9.2 percent or even more. On the other hand, if you have invested in bonds to minimize your risks, your current return rates will average from 5 to 6 percent. However, the chances are high that you own a mixture of investments. So, the return rate will depend on your asset allocation.
Average IRA Earnings
The rate at which your money will grow in an IRA will depend on all the factors discussed above. They also depend on your current age, annual contributions, adjusted gross income, how long you have been contributing and at what point you intend to withdraw your money.
You can use an online traditional IRA calculator to determine how much your money will grow at different times.
For example, assuming you:
- are 30 years old, single and have no employer plan.
- have a starting balance of $6,000.
- intend to make an annual contribution of $6,000.
- intend to retire at the age of 65.
- have an adjusted gross income of $50,000.
- intend to increase your contributions to the maximum allowed in the future.
- have a 7 percent average rate of return.
- have a 25 percent tax rate before retirement and 15 percent tax rate after retirement.
Based on online calculations, your traditional IRA could be worth $978,428 at retirement.
Invest Early for More Money
When investing, time is your friend. Your traditional IRA will increase significantly in value over a long period. It also helps that you won’t pay taxes until you begin to withdraw your money. So, the earlier you start investing through it, the better off you will be financially.
- AARP: Traditional IRA Calculator
- Journal of Accountancy: The Dos and Don’ts of IRA Investing
- Franklin Mint Federal Credit Union: IRAs (Individual Retirement Accounts)
- Forbes: Got Alternative Assets In Your IRA? Watch Out.
- S&P Global: S&P 500 returns to halve in coming decade – Goldman Sachs
- CNN: Ultimate guide to retirement
- BBC: Coronavirus: How the pandemic has changed the world economy
- FINRA: CARES Act 2020: Retirement Fund Access and Student Loan Relief
- 360 Degrees of Financial Literacy: Traditional IRA Calculator
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.