Roth IRAs typically have average annual returns of 7-10%. But the bottom line is that the amount of money you earn along the way will be dictated by your IRA's asset allocation. There is no such thing as an IRA interest rate. In a nutshell, Roth IRAs don't pay an interest rate.
A Roth IRA is similar to a shopping cart, it's basically an empty basket until you fill it. But with a Roth, you're filling that basket with investments, not cheerleaders. Individual Retirement Accounts (IRAs) were created to offer individuals a tax-advantaged way to save for retirement. The biggest advantage is not having to pay taxes on investment gains (earnings, interest or dividends) while your assets are in the account.
The sooner you start saving on an IRA, the more time you have for those savings to grow through the power of tax-advantaged compounding. Historically, IRAs have earned between 7% and 10% average annual return. Your earnings increase when you invest your IRA contributions and investment gains in interest and dividend earning opportunities, such as stocks, mutual funds, bonds, exchange-traded funds, and certificates of deposit. IRAs grow through capitalization, which helps your money grow regardless of whether you contribute or not.
While long-term savings in a Roth IRA can produce better after-tax returns, a traditional IRA can be a great alternative if you qualify for the tax deduction. While individual investments within the Roth IRA can increase interest at different rates, you can usually calculate the annual rate of return on a Roth IRA using the tools provided by the company that holds your IRA and see how the interest has been composed. The main determinants of your interest rate, defined here as the total annual growth you see in your Roth IRA portfolio, include any published interest rates for your money market accounts or CDs in your IRA. Roth IRA distributions are generally considered “qualified” as long as a Roth IRA has been open for more than five years and the owner has turned 59 and a half years old or meets other requirements.
The idea that a Roth IRA is just a medium for your investments doesn't mean that all Roth IRAs are the same. Roth IRAs are also subject to income restrictions, so check if your income is too high to contribute as much to a Roth IRA. If your IRA is heavily invested in risky assets, parking money on an IRA CD can help you diversify your portfolio. If the term of the IRA CD expires within a traditional IRA, you can keep those funds in the IRA but use them to make other investments.
In this way, Roth IRAs are the inverse of traditional tax-deferred IRAs or 401 (k) s; with those accounts, you'll have to pay taxes when you withdraw the funds. Check with your bank to make sure the funds don't have to be in this IRA or money market IRA for a certain period of time. Some banks may offer more competitive rates for five-year IRA CDs, for example, but not for six-month IRA CDs.