How much will my money grow in an IRA? To answer this question, you must first consider the different types of tax-advantaged accounts and how they affect how much you will earn. There are roughly 10 different types of accounts available that can have tax advantages. These include 401(k), 403(b), 529 education savings, health savings accounts and others.
You also have a choice of two different IRA accounts. With a traditional IRA, your contributions are tax-deductible and you do not pay taxes until you begin withdrawing from your earnings. Roth IRA contributions are not tax-deductible, and your contributions are made with after-tax dollars. You have already paid taxes on the contributions, so you will not pay taxes when you withdraw the money. The options that you choose will affect how to estimate IRA growth.
Average IRA Growth
How much does an IRA earn per year? The amount your IRA will earn per year depends on your contributions. Below the age of 50, you can only contribute $6,000 combined to all your IRA accounts. After 50, you can contribute $7,000 per year. Unlike a savings account, a Roth IRA does not automatically earn interest. You must start making investments for it to begin growing.
Your IRA growth rate depends on the diversity of your portfolio. Your risk tolerance and whether you are making the full allowable contribution also affect the amount earned. On average, most IRA accounts that are professionally managed earn between 7 and 10 percent per year.
Where You Invest Matters
Let’s assume you are under 50 and make the maximum contribution of $6,000 per year. If you contribute the maximum amount to an IRA every year, and you have an IRA that earns seven percent growth, you would have $83,095. After 50 years, you will have over $500,000. If you put that same amount of money into a savings account that earned 0.5 percent, you would only have $200,648 in 30 years.
Calculate IRA Return
How do I calculate my IRA return? The next thing to do to make plans for your retirement is to estimate IRA growth for your planned contributions. You can check with the manager of your IRA account to get the average annual IRA growth rate or you can use the 7-10 percent average. You can find many IRA calculators online that will help you calculate your projected retirement savings at that IRA growth rate.
How much will an IRA reduce my taxes? If you have a traditional IRA, your contribution will reduce your adjusted gross income (AGI) by the exact amount that you contribute. You can only take this deduction if you fall within certain income guidelines and you meet other rules that apply. You can also deduct brokerage commissions within certain limits.
Traditional vs. Roth IRA Return
An IRA is a valuable tool for making sure that you have enough to enjoy your retirement years. Let’s compare a traditional to a Roth IRA.
Let’s assume that you are going to make the maximum contribution for a person under 50 for 30 years. Using a traditional IRA, your total contributions would be $180,000, and your account would be worth $582,790. If you were to contribute the same amount to a Roth IRA, your contributions would be $195,000, your account would be worth $633,326, and your withdrawals are tax-free.
The best way to know how much you will have when you retire is to use a calculator. Factors such as inflation, recessions and personal life circumstances will have an effect on what you can save and earn. The most important thing in earning for retirement is consistency over time.
- The "Rule of 72" works well for lower rates of return. For higher percentages of return, the "Future Value" formula should be used. The method of calculating that formula is:
- 1) Simple annual interest: = Original Investment x (1 + (interest rate X number of years))
- 2) Annually compounded interest: = Original Investment x ((1 + interest rate) ^number of years).
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.