What is the Average Interest on an IRA?
IRAs are a common and popular way for Americans to save for retirement in a tax-advantaged account. However, many people believe that IRAs are investments, with interest rates and returns, when they are actually just accounts in which any type of investment can be held. The types of investments you choose for your IRA will dictate the returns you receive.
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Function
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IRA stands for Individual Retirement Account. An IRA is just that--an account, or a holder for your money. The IRA itself does not earn interest or dividends. Once you have money inside of an IRA, you must then choose an investment for that money so that it can earn interest.
Features
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Almost any type of investment can be held inside an IRA, including stocks, bonds, mutual funds, CDs, real estate and more. CDs are an extremely safe investment but earn a low interest rate, usually just slightly more than inflation. Stocks are much riskier, but come with the possibility of much better returns. The stock market as a whole has averaged growth of about 10% a year since inception. Bonds and mutual funds are in between these extremes, both in terms of risk and return. Real estate can have excellent returns, but it can also be very risky for inexperienced investors.
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Types
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Different types of stocks and mutual funds will have varying returns depending on their asset class and risk profile. Index funds will simply mirror the performance of the market as a whole, while actively managed funds may outperform or underperform the market by a significant margin. Single stocks are even more volatile--two similar companies may have extremely different stock returns.
Misconceptions
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IRA investors often confuse their IRA (account) with an investment due to misleading advertisements from banks and other financial companies. Salespeople often push IRA products by making customers think that their investment is the only way to open an IRA, or that their investment is the only investment a person can have within their IRA. IRAs are actually extremely flexible and can be opened at almost any institution. Additionally, investors can have as many IRA accounts as they like, as long as they don't exceed the yearly contribution limit across all accounts.
Considerations
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Investors looking for huge returns on their IRA investments must also be willing to assume a good deal of risk. For the extremely risk-averse, CDs are a good choice that pay a predictable amount of interest every month. However, investors that choose only safe investments will have a very difficult time keeping up with inflation.
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