How to Calculate an IRA Return

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An IRA is a retirement savings account where investors can invest in one of many types of investments. Each type of investment has different risks and returns over time. Periodically calculating the return on investment gives you a way to gauge how your entire portfolio is performing. When calculating the net earnings on the IRA, you should consider any fees that are associated with the investment to get an accurate picture of your investment strategies and what may need to be adjusted. All the information you need to calculate annual returns is on your year-end statement.

Things You'll Need

  • Year-end statement
  • Pencil
  • Paper
  • Calculator
  • Write down the formula for return on investment: ROI = (End Value - Cost Basis) / Cost Basis.

    Cost basis is the amount you paid for the investment, including any fees associated with the purchase or maintenance of the account.

  • Define your variables. Assume you started with $10,000 at the beginning of the year and ended with an IRA value of $11,500. Add annual custodial fees of $35 to the year's starting balance plus $220 worth of transaction fees.

  • Fill in the variables: ROI = (11,500 - 10,255) / 10,255.

  • Calculate: ROI = 0.1214. Your rate of return on your IRA is 12.14% after all expenses for the year.

Tips & Warnings

  • IRAs do not have an annual tax consequence, which allows investors to more freely move in and out of investments without concerns of capital gains taxes. Distributions of traditional IRAs are treated as income, and Roth IRAs are distributed tax-free after age 59 1/2.
  • Reducing transaction fees can increase your overall return on the investment.

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References

  • Photo Credit A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
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