A Roth IRA doesn't earn interest the way a savings account does—it grows through the investments you choose to hold inside it
When you open a Roth IRA, you're not putting money into an account that pays you interest. Instead, you're opening a container that holds investments—stocks, bonds, mutual funds, or other assets. The growth comes from those investments gaining value over time, not from the account itself paying you a rate.
Think of it this way: a regular savings account pays you interest because the bank uses your money and pays you for that use. A Roth IRA is different. You control what goes inside it. If you buy a stock mutual fund and that fund goes up 8% in a year, your Roth IRA balance goes up 8%. If you buy a bond fund that returns 3%, your balance grows by 3%. If you leave the money sitting in cash, it doesn't grow at all—it just sits there.
The real power of a Roth IRA isn't the interest rate. It's that all the growth—whether from dividends, capital gains, or interest from bonds inside the account—is tax-free when you withdraw it in retirement. That's the advantage you're paying for by using a Roth instead of a regular brokerage account.
Key Takeaways
- A Roth IRA grows through the investments you put in it, not through interest paid by the account itself.
- You choose what to invest in—stock funds, bond funds, individual stocks, or even money market funds—and your growth depends on how those investments perform.
- All earnings inside a Roth IRA grow tax-free, and you pay no tax when you withdraw them in retirement, which is the main benefit over a regular investment account.
- If you want may provide growth similar to interest, you can hold a certificate of deposit (CD) or money market fund inside your Roth IRA, though the rates are typically lower than stocks or bonds over long periods.
What investments you can hold in a Roth IRA
Most Roth IRAs are held at a brokerage firm—Vanguard, Fidelity, Charles Schwab, or similar—and you can invest in almost anything that firm offers. This usually includes stock mutual funds, bond mutual funds, exchange-traded funds (ETFs), individual stocks, and individual bonds.
Some people use a Roth IRA to hold a money market fund or a high-yield savings account, which do pay interest. The interest rate varies by provider and changes with the Federal Reserve's rate decisions, but it's typically lower than what you'd earn from stocks or bonds over a 20 or 30-year period. The advantage is that your money is stable and you know exactly what you'll earn.
A few brokerages also allow you to hold real estate investment trusts (REITs), cryptocurrency, or other assets inside a Roth, though this is less common and often requires a self-directed IRA custodian.
How earnings compound inside a Roth IRA
One reason a Roth IRA is powerful is that you never pay tax on the growth, so every dollar of earnings stays in the account and compounds. If you invest $7,000 and it grows to $8,000, that $1,000 gain stays in the account. The next year, your $8,000 grows again—and you're earning returns on the original $7,000 plus the $1,000 gain.
In a regular taxable brokerage account, you'd owe tax on that $1,000 gain in the year it happened, which means less money stays in the account to compound. Over decades, this tax-free compounding is the real advantage of a Roth IRA, not the interest rate itself.
The longer your money sits in a Roth IRA, the more this compounds. A 25-year-old who invests $7,000 a year for 40 years will see far more growth than someone who starts at 45, even if both invest the same total amount, because the early investor's money has more time to compound.
The difference between interest and investment returns
Interest is a fixed payment you receive for lending money. A savings account pays you interest because the bank borrows your money. A CD pays interest because you agree to lock up your money for a set time. The rate is set in advance and doesn't change.
Investment returns are the gains (or losses) from owning something that changes in value. A stock fund's return depends on whether the companies in it do well or poorly. A bond fund's return depends on interest rates and whether borrowers pay back their loans. These returns are not may provide and can be negative in any given year.
A Roth IRA can hold either type—you can own a CD inside a Roth and earn interest, or you can own a stock fund and earn returns. The choice is yours, and it depends on how much risk you're willing to take and how long you have until you need the money.
How to choose what to invest in inside your Roth IRA
If you're young and won't need the money for 30+ years, most financial advisors suggest holding mostly stock funds or ETFs, because stocks have historically returned around 10% per year on average over long periods (though with ups and downs along the way). The longer your time horizon, the more you can weather the bad years.
If you're closer to retirement or uncomfortable with the idea of your balance dropping in a bad market year, you might hold a mix—some stock funds and some bond funds or money market funds. Bonds are less volatile than stocks but typically return less over time.
Many people use a target-date fund, which automatically shifts from stocks to bonds as you get closer to retirement. You pick the fund based on the year you plan to retire, and the fund does the rebalancing for you. This is a simple way to start if you don't want to pick individual investments.
What happens if your Roth IRA loses money
If the investments inside your Roth IRA drop in value—say, the stock market falls 20% in a year—your account balance drops too. This is a real risk, and it's why some people choose more conservative investments or hold some cash.
The good news is that losses inside a Roth IRA don't create a tax deduction the way losses in a regular brokerage account sometimes do. You simply wait for the market to recover, and your tax-free growth resumes. If you sell an investment at a loss and then buy it back, there's no wash-sale rule (a rule that applies to regular accounts) that prevents you from doing so.
Over very long periods—20 years or more—stock market losses have always recovered and gone on to new highs. But in any single year or five-year period, losses are possible, and you need to be prepared for that mentally.
Frequently Asked Questions
Can I put money in a Roth IRA and just leave it in cash?
Yes. If you deposit $7,000 and don't invest it, it will sit as cash in your account and earn little to no interest. This is sometimes done temporarily while you decide what to invest in, but it defeats the purpose of a Roth IRA over time. You're better off keeping emergency cash in a high-yield savings account and using the Roth for investments.
What's the average return on a Roth IRA?
There is no single average return because it depends entirely on what you invest in. A stock index fund has historically returned around 10% per year on average over long periods, but with significant variation year to year. A bond fund might return 3–5%. A money market fund might return 4–5% currently, but that changes with interest rates. Your actual return depends on your specific investments and when you buy and sell.
Do I have to pick my investments myself?
No. Most brokerages offer robo-advisor services that automatically build and manage a portfolio for you based on your age and risk tolerance. You can also choose a target-date fund, which rebalances automatically. If you prefer hands-off investing, either option removes the need to pick individual funds.
Can I move money between investments inside my Roth IRA without paying tax?
Yes. You can buy and sell investments inside your Roth IRA as many times as you want without triggering any tax. The tax-free growth applies to all earnings, regardless of how often you trade. This is different from a regular brokerage account, where each sale can trigger a capital gains tax.
What if I need to withdraw money from my Roth IRA early?
You can withdraw your contributions (the money you put in) at any time without penalty or tax. Withdrawals of earnings before age 59½ are typically subject to tax and a 10% penalty, though some exceptions exist. This is why a Roth IRA is best used as a long-term retirement account, not as a savings account for near-term goals.