IRA interest rates depend entirely on what you put your money into

An IRA itself does not earn interest. It is a container—a tax-sheltered account type. The interest or growth you earn comes from whatever you invest the money in: a savings account, a certificate of deposit (CD), bonds, stocks, mutual funds, or other investments. A bank IRA savings account might earn 4% to 5% annually right now. An IRA holding stock mutual funds might earn nothing one year and 10% the next, or lose money. The rate is not set by the IRA; it is set by the investment you choose.

This distinction matters because many people open an IRA expecting a may provide return, then feel surprised when their money does not grow the way they imagined. The IRA is the legal wrapper that gives you tax benefits. What happens inside that wrapper is up to you.

Key Takeaways

  • An IRA earns whatever rate the investment inside it earns—savings accounts, CDs, stocks, or mutual funds all have different returns.
  • IRA savings accounts at banks currently earn between 4% and 5% annually, though this rate changes as the Federal Reserve adjusts interest rates.
  • Stock-based investments in an IRA have no may provide return and can gain or lose value depending on market conditions.
  • The tax advantage of an IRA (Traditional or Roth) applies to whatever earnings you make, but does not create earnings on its own.

How IRA savings accounts work

If you open an IRA at a bank and keep the money in a savings account or CD, you earn whatever interest rate that bank is currently offering. As of late 2024, many banks offer IRA savings accounts at rates between 4% and 5% per year. That rate is not locked in forever—it changes when the Federal Reserve changes its benchmark interest rate, which happens several times per year.

A CD inside an IRA works the same way. You deposit money, agree to leave it untouched for a set period (three months, one year, five years), and the bank pays you a fixed rate for that term. If you withdraw the money early, you pay a penalty. The rate you lock in depends on how long you commit the money and what the bank is offering that week.

The advantage of keeping IRA money in a savings account or CD is predictability. You know exactly what you will earn. The disadvantage is that 4% or 5% may not keep pace with inflation over decades, especially if you are saving for retirement 20 or 30 years away.

How stock and mutual fund investments work inside an IRA

If you open an IRA at a brokerage (like Fidelity, Vanguard, or Charles Schwab) and invest in stocks or mutual funds, your return depends on how those investments perform. There is no may provide rate. The stock market has returned an average of roughly 10% per year over very long periods, but that average includes years with gains of 30% and years with losses of 20%. Your actual return in any given year could be much higher or much lower than that average.

Most people do not pick individual stocks. Instead, they invest in index funds or target-date funds. An index fund tracks a broad group of stocks (like all 500 companies in the S&P 500) and charges a small fee. A target-date fund automatically shifts from stocks to bonds as you get closer to retirement. Neither guarantees a return, but both spread your risk across many companies instead of betting on one.

The trade-off is clear: stock investments have higher potential returns than savings accounts, but they also have the potential to lose money. If you need the money in five years, a stock-heavy IRA is riskier than a savings account IRA. If you will not touch the money for 30 years, the higher long-term growth potential of stocks often outweighs the short-term ups and downs.

What the tax advantage actually does

The IRA tax benefit does not create earnings. It protects the earnings you make. In a Traditional IRA, you may deduct your contributions from your taxes in the year you make them, and you do not pay taxes on the growth until you withdraw the money in retirement. In a Roth IRA, you contribute after-tax money, but all the growth and withdrawals are tax-free.

This matters because taxes eat into returns. If you earn $1,000 in interest in a regular savings account, you owe income tax on that $1,000. If you earn $1,000 in interest in an IRA, you owe no tax on it (in a Roth) or you defer the tax until later (in a Traditional IRA). Over decades, that tax deferral or tax-free growth adds up significantly. But the IRA itself is not generating that $1,000—your investment is. The IRA is just protecting it from taxes.

How to compare what different IRA investments actually earn

To decide what to put your IRA money into, look at the actual rates or historical returns being offered. For savings accounts and CDs, banks publish their rates publicly. You can visit Bankrate, DepositAccounts, or the banks' own websites and see exactly what they are paying right now. These rates change frequently, so check before you open the account.

For stocks and mutual funds, look at the fund's prospectus—a document the fund company is required to provide. It shows the fund's average annual return over the past 1, 5, 10, and 20 years. Past performance does not predict future results, but it gives you a sense of what the fund has historically done. You can also compare the fund's fees (called the expense ratio), because a fund that charges 1% per year will earn you less than an identical fund that charges 0.1% per year.

Many brokerages offer robo-advisors that automatically build and manage a portfolio for you based on your age and risk tolerance. These typically charge a small fee (0.25% to 0.50% per year) and invest your money in a mix of low-cost index funds. They are a middle ground between the simplicity of a savings account and the complexity of picking individual investments.

Why your IRA earnings might be lower than you expect

Even if you choose an investment with a good historical return, your actual earnings might disappoint. The most common reason is fees. If you invest in a mutual fund that charges 1% per year in fees, and the fund's underlying investments return 8%, you only keep 7%. Over 30 years, that 1% difference compounds into a much smaller nest egg. Always check the expense ratio before you invest.

Another reason is timing. If you invest a lump sum right before a market crash, you will lose money on paper for a while. If you invest gradually over time (called dollar-cost averaging), you buy more shares when prices are low and fewer when prices are high, which can smooth out the bumps. But there is no way to predict the market, so the safest approach for most people is to invest consistently and leave the money alone.

Finally, some people open an IRA and then do not contribute to it regularly. An IRA that sits with $5,000 in it for 30 years will grow, but an IRA that receives $7,000 per year (the current annual limit) for 30 years will grow much faster. The power of an IRA comes partly from the tax benefit, but mostly from time and consistent contributions.

Frequently Asked Questions

Can I move my IRA money from a savings account to stocks if I change my mind?

Yes. You can move money between investments within the same IRA without penalty or tax consequences. If you open an IRA savings account at a bank and later decide you want to invest in stocks, you can transfer the money to a brokerage IRA. The transfer itself does not trigger taxes. You only pay taxes when you withdraw money from the IRA in retirement.

What interest rate should I expect from an IRA savings account right now?

Rates vary by bank and change frequently as the Federal Reserve adjusts interest rates. As of late 2024, many banks offer IRA savings accounts between 4% and 5% annually. Check current rates on Bankrate or DepositAccounts before opening an account, because the rate you see today may be different next month.

Is a 4% return in an IRA savings account better than investing in stocks?

It depends on your timeline. A 4% may provide return is safer and more predictable, which matters if you need the money soon. But if you will not touch the money for 20+ years, stocks have historically returned more over long periods, even accounting for market downturns. The trade-off is that stocks are volatile in the short term. A common approach is to keep some money in savings and some in stocks, shifting toward more savings as you get closer to retirement.

Do I have to pay taxes on the interest my IRA earns?

Not while the money is in the IRA. In a Traditional IRA, you pay taxes on all withdrawals in retirement, including the earnings. In a Roth IRA, you never pay taxes on the earnings if you follow the withdrawal rules. This tax deferral or tax-free growth is the main advantage of using an IRA instead of a regular savings account.

What happens if my IRA investment loses money?

You can deduct the loss on your taxes, but only under specific conditions and only for Traditional IRAs. Most people do not bother because the paperwork is complex. The more practical approach is to think of losses as temporary if you have a long time horizon. Market downturns are normal, and historically the market has recovered and gone higher within a few years.