Roth IRAs don't earn interest the way a savings account does—they hold investments that grow in value

A Roth IRA is a container for money, not a product that pays you interest. The growth comes from what you put inside it. If you deposit cash and leave it sitting, it stays flat. If you buy stocks, bonds, or funds, those investments rise and fall in value. The IRA itself doesn't generate returns; your investments do.

The confusion happens because banks advertise "IRA savings accounts" that do pay interest—usually a low rate. Those are real products, but they're not the only option. Most people with Roth IRAs own mutual funds, index funds, or individual stocks instead, which historically grow faster than interest-bearing accounts but carry more risk.

The tax advantage of a Roth IRA is that whatever your investments earn—whether it's interest, dividends, or capital gains—grows tax-free. You never pay federal tax on that growth, and you can withdraw it tax-free in retirement. That's the real power of the account, not the interest rate itself.

Key Takeaways

  • A Roth IRA holds investments like stocks and funds; it doesn't pay interest on its own.
  • You choose what goes inside your Roth IRA—a savings account, mutual funds, individual stocks, or bonds—and that choice determines how much it grows.
  • All growth inside a Roth IRA is tax-free, whether it comes from interest, dividends, or stock price increases.
  • An IRA savings account at a bank will pay interest (usually 4% to 5% currently, though rates change), but it typically grows slower than stock-based investments over long periods.

What actually grows your Roth IRA balance

Your Roth IRA grows through three mechanisms: interest (if you hold a savings account or CDs inside it), dividends (if you own dividend-paying stocks or funds), and capital appreciation (if the value of your stocks or funds increases). You control which of these applies by choosing what to invest in.

If you open a Roth IRA at a bank and keep the money in a savings account, you'll earn whatever interest rate that bank offers. As of late 2024, high-yield savings accounts inside IRAs typically pay between 4% and 5% annually, though this varies by bank and changes over time. That's predictable but modest growth.

If you open a Roth IRA at a brokerage like Fidelity, Vanguard, or Charles Schwab and buy an S&P 500 index fund, your growth comes from the fund's value increasing as the companies in it become more profitable. Historically, the stock market has returned around 10% per year on average over decades, but that includes years of losses. You're not earning interest; you're betting that stock prices will rise.

Most people mix these: some bonds or stable funds for predictability, some stock funds for growth. The exact mix depends on your age, risk tolerance, and how long until you retire.

The difference between interest and investment growth

Interest is a may provide payment from a bank or lender for letting them use your money. A savings account paying 4.5% means you earn $45 per year on every $1,000 you deposit. That rate is fixed (until the bank changes it), and you know exactly what you'll have.

Investment growth is unpredictable. If you own a stock fund worth $1,000 and it rises 8% in a year, you have $1,080. If it falls 5%, you have $950. Over 30 years, stock funds have historically outpaced savings accounts, but in any given year or five-year stretch, they might underperform. You're trading certainty for higher potential returns.

Inside a Roth IRA, both approaches are tax-free. The choice is about how much risk you can stomach and how long your money will sit there. If you're 25 and won't touch the money for 40 years, stock funds make sense despite the volatility. If you're 60 and need stability, a savings account or bond fund is more appropriate.

Where to open a Roth IRA and what your options are

You can open a Roth IRA at a bank, a brokerage, or a robo-advisor. Each offers different investment choices and different growth potential.

Banks (like Ally, Marcus, or your local credit union) offer Roth IRAs that function as savings accounts. You'll earn interest, usually between 4% and 5%, with no stock market risk. The downside is that growth is slow compared to historical stock returns. Banks are best if you want simplicity and predictability.

Brokerages (Fidelity, Vanguard, Charles Schwab, E-Trade) let you buy stocks, bonds, mutual funds, and ETFs inside your Roth IRA. You have thousands of investment choices and historically higher growth potential, but you have to decide what to buy or pay for professional management. Most people buy low-cost index funds and hold them for decades.

Robo-advisors (Betterment, Wealthfront, M1 Finance) let you open a Roth IRA and automatically invest your money in a diversified portfolio based on your age and risk tolerance. They charge a small fee (usually 0.25% of your balance per year) but handle the decisions for you. This is a middle ground: more growth potential than a savings account, less work than picking individual funds.

How much you can contribute and when growth starts

For 2024, you can contribute up to $7,000 per year to a Roth IRA if you're under 50, or $8,000 if you're 50 or older. (These limits change annually.) You can contribute for the current year until the tax deadline the following April.

Growth starts immediately. If you deposit $7,000 on January 1 and it's in a fund that rises 10% by December 31, you have $7,700. That $700 gain is tax-free and stays tax-free forever, even when you withdraw it in retirement. If you wait until March to deposit the same $7,000, it has less time to grow that year, but it still grows tax-free.

The longer your money sits in a Roth IRA, the more powerful this tax-free growth becomes. A $7,000 contribution at age 25 that averages 8% annual growth becomes roughly $280,000 by age 65. A $7,000 contribution at age 55 becomes roughly $18,000 by age 65. Time is the biggest factor in how much your Roth IRA grows.

Tax-free growth is the real advantage

The interest rate or investment return inside a Roth IRA matters less than the fact that you never pay tax on it. Compare two scenarios: $10,000 in a regular savings account earning 4.5% versus $10,000 in a Roth IRA earning 4.5%.

In the savings account, you owe federal income tax on the interest you earn each year. If you're in the 22% tax bracket, that 4.5% return becomes 3.51% after tax. Over 20 years, $10,000 grows to about $19,700.

In the Roth IRA, you pay no tax on that 4.5% return. Over 20 years, $10,000 grows to about $24,000. The difference is entirely tax savings. With stock funds that historically return 8% to 10%, the gap widens even more.

This is why a Roth IRA with a modest interest rate often beats a taxable account with a higher rate. The tax shelter is the product, not the interest itself.

What happens to your Roth IRA when you retire

At age 59½, you can withdraw your contributions and all the growth tax-free and penalty-free. You don't have to take withdrawals at any specific age (unlike traditional IRAs, which require withdrawals starting at 73). Your money can keep growing tax-free for as long as you leave it there.

If you withdraw before 59½, you can always take out your contributions without penalty, but earnings are subject to tax and a 10% penalty unless you meet a narrow exception (first-time home purchase, disability, or a few others). This is why a Roth IRA is best for money you won't need for at least five years.

When you die, your heirs inherit the Roth IRA and can withdraw it tax-free. This makes a Roth IRA a powerful tool for leaving money to the next generation without a tax bill.

Frequently Asked Questions

Can I lose money in a Roth IRA?

Yes, if you invest in stocks or stock funds. If your fund drops 20% in a market downturn, your balance drops 20%. However, if you hold a savings account or CDs inside your Roth IRA, your balance is insured by the FDIC up to $250,000 and won't drop. The risk depends entirely on what you choose to hold.

What's the difference between a Roth IRA and a regular savings account?

A savings account is a product that pays interest. A Roth IRA is a tax-sheltered account that can hold a savings account, investments, or both. You can have a Roth IRA savings account (which pays interest) or a Roth IRA brokerage account (which holds stocks and funds). The Roth IRA is the wrapper; what's inside determines your growth.

Should I choose a savings account or stock funds for my Roth IRA?

If you're under 50 and won't need the money for 10+ years, stock funds historically offer better long-term growth despite short-term volatility. If you're within 10 years of retirement or uncomfortable with market swings, a savings account or bond funds provide stability. Many people use both: stocks for long-term money, savings accounts for money they might need sooner.

Do I have to pick my investments myself?

No. You can use a robo-advisor that automatically invests based on your age, buy a single target-date fund that adjusts automatically as you age, or keep your money in a savings account. You can also work with a financial advisor, though most charge fees. The simplest approach for beginners is a single low-cost index fund or a target-date fund.

Can I move my Roth IRA to a different bank or brokerage?

Yes. You can transfer your Roth IRA from one institution to another without tax or penalty. This is called a trustee-to-trustee transfer and takes a few weeks. You might do this to access better investment options, lower fees, or better customer service. The growth inside your Roth IRA continues tax-free regardless of where it's held.