What Is the Return on Investment on an IRA?

by Brian Nelson ; Updated July 27, 2017

With the population in America steadily marching toward their 60s, saving for retirement has become more important than ever. Unfortunately, investing for retirement isn't always simple or easy. However, an IRA can help with saving money for retirement and save money on taxes at the same time. The question on everyone's mind then is how much does an IRA make?

Function

An IRA, or Individual Retirement Arrangement, is a type of account which has specific rules and regulations as part of the US tax code to allow individuals to save and invest for retirement while deferring taxes on any income.

Significance

Millions of Americans have IRA accounts and they will make up a significant portion of retirement funding for many people. Thus, it is critical that IRA accounts are fully understood by their account owners.

Misconceptions

An IRA account itself has no rate of return. An IRA is nothing more than a type of account. Many financial institutions have used advertising that suggests that an IRA earns its own interest, when what is actually true is that the instrument in which the money is placed is what has an return. So, a sign at the bank that says our IRA earns 5% actually means that the bank offers IRA accounts and that inside of that IRA account, the bank has a savings instrument such as a CD or money market account, that earns 5%.

Benefits

All returns whether dividends, interest, or capital gains, are tax differed while inside of an IRA account. This allows the money to grow faster and bigger without having to pay taxes.

Types

There are several types of IRAs. The most common are the traditional IRA and the Roth IRA. The primary difference is that the traditional IRA may allow certain tax payers a deduction based on their contribution. However, all withdrawals will then be taxed as ordinary income. Conversely, a Roth IRA provides no tax deduction upon contribution, but all withdrawals will be tax-free. Both accounts differ all taxes while the funds are inside the IRA account.

Warning

Many IRA accounts charge an annual fee. If this fee is high in relation to the amount invested it may negate a large portion, or even all, of an investment's gains within the IRA. Check and make sure the fee makes sense relative to the investment amount. Furthermore, some institutions will waive the IRA fee once a certain amount is in the account, or in all accounts held at that institution.