An IRA itself doesn't earn interest—the investments inside it do
An Individual Retirement Account (IRA) is a container, not an investment. It holds money, but the money doesn't sit idle earning interest the way a savings account does. Instead, whatever you put into an IRA—stocks, bonds, mutual funds, certificates of deposit—is what generates returns. The IRA is just the tax-advantaged wrapper around those investments.
This distinction matters because it means your earnings depend entirely on what you choose to hold inside the account. A conservative IRA full of CDs might earn 4 to 5 percent annually. An IRA invested in stock index funds might earn 7 to 10 percent over time, or lose money in a down year. An IRA sitting in cash earns almost nothing. You control the growth by controlling what's inside.
Key Takeaways
- An IRA is a container for investments; the investments themselves generate returns, not the account structure.
- You can hold CDs, bonds, stocks, mutual funds, or money market accounts inside an IRA, and each earns differently.
- The tax advantage of an IRA is that earnings grow without being taxed each year—you pay taxes only when you withdraw in retirement.
- Your IRA custodian (your bank or brokerage) sets the menu of what you can invest in; you pick from that menu.
- Moving money between investments inside your IRA does not trigger taxes, so you can shift from low-earning to higher-earning options without penalty.
What actually earns money inside an IRA
The most common IRA investments are mutual funds and exchange-traded funds (ETFs), which hold baskets of stocks or bonds. A stock fund might return 8 to 12 percent in a good year; a bond fund typically returns 3 to 5 percent. These are historical ranges, not guarantees, and past performance does not predict future results.
Certificates of deposit (CDs) held inside an IRA earn a fixed rate set by the bank—currently ranging from 4 to 5.5 percent depending on the term and the bank, though these rates change. Individual stocks earn money through price appreciation and dividends. Money market accounts inside an IRA earn rates similar to savings accounts, usually 4 to 5 percent right now.
Some people hold bonds—either individual bonds or bond funds—inside an IRA. Bonds pay interest, typically 3 to 5 percent depending on the type and current market conditions. The key point: you choose what goes in the account, and that choice determines how much it can earn.
How the tax advantage actually works
The real power of an IRA is not that it earns more than other accounts—it's that earnings are not taxed every year. In a regular taxable brokerage account, if your mutual fund earns $2,000 in gains, you owe taxes on that $2,000 in the year it happens. In an IRA, that $2,000 stays in the account and compounds without an annual tax bill.
Over 20 or 30 years, this tax deferral adds up significantly. Money that would have gone to taxes stays invested and earning more. When you withdraw in retirement, you pay taxes on the withdrawal (in a traditional IRA) or you pay nothing (in a Roth IRA, if you follow the rules). This tax structure is what makes IRAs powerful for long-term saving, not the earning rate itself.
The difference between a traditional IRA and a Roth IRA
A traditional IRA lets you deduct contributions from your taxes in the year you make them, and you pay taxes on withdrawals in retirement. A Roth IRA takes contributions after tax, but withdrawals in retirement are tax-free—including all the earnings.
Both hold the same types of investments and earn the same way. The difference is when you pay taxes. In a Roth, if your $5,000 contribution grows to $25,000 over 30 years, you withdraw all $25,000 tax-free. In a traditional IRA, you withdraw the $25,000 but pay income tax on it. The earning potential is identical; the tax timing is different.
Your income determines whether you can contribute to a Roth IRA directly. If your income is above certain thresholds (which vary by year and filing status), you may not be able to contribute to a Roth, though a backdoor Roth conversion is an option some people use. A traditional IRA has no income limit for contributions, though the tax deduction phases out at higher incomes.
What your IRA custodian offers matters
Your IRA custodian—the bank, brokerage, or investment firm holding your account—determines what you can invest in. Vanguard, Fidelity, Charles Schwab, and most major brokerages offer thousands of mutual funds, ETFs, and individual stocks. A traditional bank might offer only CDs and money market accounts.
If you want to own individual stocks or a specific mutual fund, check whether your custodian offers it before opening an account. Some custodians charge fees for certain transactions; others do not. These costs matter over decades because they reduce your net earnings. A fund with a 0.05 percent expense ratio costs far less than one with a 1 percent ratio, and that difference compounds.
You can move money between investments without triggering taxes
One of the most useful features of an IRA is that you can shift money between investments inside the account without paying taxes or penalties. If you have $10,000 in a bond fund earning 3 percent and you want to move it to a stock fund that might earn 8 percent, you can do that instantly. No tax bill. No penalty.
This freedom means you can adjust your strategy as you age, as market conditions change, or as your understanding of investing improves. You cannot do this in a taxable account without triggering capital gains taxes. This flexibility is another reason IRAs are structured the way they are.
The one exception: if you move money between IRAs at different custodians, you have 60 days to complete the transfer, or the IRS treats it as a withdrawal and taxes it. Direct transfers between custodians avoid this rule entirely, so if you're moving accounts, ask your new custodian to handle a direct transfer.
How much you can contribute limits how much can grow
The IRS sets annual contribution limits for IRAs. For 2024, the limit is $7,000 per year for people under 50, and $8,000 for people 50 and older (the extra $1,000 is a catch-up contribution). These limits change periodically and vary by account type.
You cannot contribute more than you earned in income that year, and you cannot contribute to a Roth IRA if your income exceeds the phase-out range. These limits exist because IRAs are tax-advantaged, and the government restricts how much tax benefit any one person can claim annually.
The contribution limit is separate from how much your account can grow. If you contribute $7,000 and it grows to $50,000, that growth is not limited. The $7,000 is just the annual deposit cap.
Frequently Asked Questions
Can I lose money in an IRA?
Yes, if your investments decline in value. If you hold stock funds and the market drops 20 percent, your IRA balance drops 20 percent too. The tax-advantaged structure does not protect you from market losses. CDs and money market accounts inside an IRA do not lose value, but they earn less.
What happens to my IRA earnings when I retire?
In a traditional IRA, you pay income tax on withdrawals, including all earnings. In a Roth IRA, withdrawals are tax-free if you've held the account at least five years and are 59½ or older. You must start taking withdrawals from a traditional IRA at age 73 (the required minimum distribution age), but Roth IRAs have no withdrawal requirement during your lifetime.
Is it better to put money in an IRA or a savings account?
An IRA is better for long-term retirement saving because earnings are not taxed annually. A savings account is better for money you need within a few years, because IRAs charge a 10 percent penalty plus taxes if you withdraw before 59½ (with limited exceptions). For retirement money you won't touch for decades, an IRA's tax advantage compounds significantly.
Can I have both a traditional IRA and a Roth IRA?
Yes, but your total contributions across all IRAs cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can contribute only $3,000 to a Roth that year (assuming the $7,000 limit). Many people use both to diversify their tax situation in retirement.
Do I need to pick my investments when I open an IRA?
No. You can open an IRA and leave the money in a money market account or cash while you decide. However, money sitting in cash earns very little—currently around 4 to 5 percent. Most people invest it within days or weeks to put it to work toward their retirement goal.