- The Required Minimum Distribution From an IRA & Nontaxable Portions
- How Is Interest Calculated on My IRA Savings or CD Accounts?
- Can Grandparents Set Up Roth IRA Accounts for Their Grandchildren Under 18 Years-of-Age?
- How do I Compute Bond Equivalent Yield & the Effective Annual Rate?
- Is an IRA Investment Income?
- Will Moving My Money Into an IRA Be Effective on This Year's Taxes?
An Individual Retirement Arrangement is a container that can hold many different types of investments, meaning that the interest rate you earn on an IRA will vary depending on the type of investments that your IRA contains. Most experts agree that younger savers should invest their money more aggressively, focusing on equity investments to capitalize on the potential to earn more money long-term. As you get older, and closer to retirement, choosing more conservative investments with less potential for loss makes sense.
Bank Deposit Accounts
Bank deposit accounts, such as savings accounts and certificates of deposit, are some of the most conservative IRA choices; they enjoy the benefit of government insurance against loss up to $250,000. In exchange for the security of these accounts, they also offer some of the lowest interest rates and returns on investment of any choices. As of February 2013 most savings accounts offered rates below 1 percent, with five-year certificates of deposit averaging 1.19 percent per year, according to Kiplinger magazine.
Money Market Mutual Funds
Money market mutual funds invest in short-term debt of the U.S. government and corporations, including banks. These debt instruments are of the highest quality, and the risk of loss is extremely low, making them a relatively safe place to invest. The annual yield on money market mutual funds is also extremely low. According to Money Magazine and Bankrate.com, the average yield on a money market fund was 0.03 percent as of February 2013.
Equity investments, or ownership interests in companies through stock market investing, offer a chance at some of the highest returns, but also are some of the most volatile of all investments, meaning that large changes in the value of your investments are possible over relatively short time frames. Still, if you can tolerate these shifts, you can benefit significantly over the long term. The Office of the Chief Actuary for the U.S. government uses a long-term stock market return estimate of 7 percent annually, when considering stock market investments as a replacement for Social Security. This estimate takes inflation into account. Other experts place overall stock market long-term returns at between 8 and 10 percent historically.
Bonds are debt instruments sold by businesses and the U.S. and local governments. A bond is a promise to pay back a certain amount of money over time at a predefined interest rate. As interest rates on investments rise and fall, the value of the bond will change, due to the bond's interest rate either being higher or lower than the prevailing market rates. According to investment researcher Ibbotson Associates, long-term government bonds have returned between 5 and 6 percent on average since 1926.
- Kiplinger: Where to Score the Best Interest Rates on Your Savings
- CNN Money: Are Money Market Accounts and Funds the Same?
- CNN Money: Where Not to Stash Your Cash
- Social Security Administration: What Stock Market Returns to Expect for Your Future
- CNN Money: How do Bond Returns Compare with Stock Returns?