How to Calculate the Annual Percentage Yield on an IRA

While loans have an annual percentage rate, investment accounts, such as individual retirement accounts, use an annual percentage yield when determining how your investments are performing. The APY is the rate of return on your investments adjusted for a one-year period, to allow for easy comparison of various investments over the same time period or the same investment over various time periods. With some basic facts about your IRA, you can calculate the APY for the account on your own.

Determine the Total Dollar Gain

You must know the total dollar gain on your IRA for the time frame that you wish to calculate the APY. Gather your statements for your account over the period of time that you wish to calculate the APY. Total any deposits you have made to the account and subtract them, plus the beginning balance, from the ending balance of the account. This is the total amount you have gained in your IRA.

Find the Compounding Period

A critical part of the calculation for APY involves the time period over which you are reviewing your IRA. You will adjust the calculation of your gains to reflect the amount of increase over a one-year period. You will need the amount of time that you are reviewing in your IRA in days, based on a 365-day year. For example, if you are looking at the time period from Jan. 1, 2011, through March 31, 2011, the total number of days is 90. It is easier to calculate APY if you consider the gains over full-year periods.

Review the Formula

The exact formula for APY calculation is as follows: APY = 100 [(1 + Interest/Principal) raised to the power of (365/Days in term) – 1 If you are calculating for a one-year period, the formula is much simpler: APY = 100 (Interest/Principal) In these formulas, interest is the gain on the account over the time period you are looking at, and the principal is the amount that you have contributed to the account.

Do the Calculation

While the formulas look complicated, the actual calculation is not too difficult. For example, assume you are looking at an account over 300 days. If you invested $5,000 in the account, and the account is now worth $5,500, you have a gain of $500. The first part of the formula is to add 1 to the result of $500 divided by $5,000, for a total of 1.1. The second part is to divide 365 by 300, with 1.2166 the result. Raise the result of the first calculation to the power of the second, resulting in 1.1229. Subtract 1 from this number, and multiply by 100, to arrive at your APY of 12.29 percent.

About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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