IRAs don't earn interest themselves—your investments inside them do

An IRA is a container, not an investment. The money you put into an IRA sits in whatever you choose to hold it in: stocks, bonds, mutual funds, money market accounts, or cash. Those holdings earn returns. A money market account inside an IRA might earn interest. A stock fund inside an IRA earns through price growth and dividends. The IRA itself is just the tax-sheltered wrapper that lets those earnings grow without being taxed every year.

What makes an IRA different from a regular brokerage account is the tax treatment. When your investments earn money inside an IRA, you don't pay tax on those earnings each year. In a traditional IRA, you don't pay tax until you withdraw the money in retirement. In a Roth IRA, you don't pay tax on those earnings ever, as long as you follow the withdrawal rules. That tax deferral is the entire point—it lets compound growth work harder for you.

How much your IRA grows depends entirely on what you put your money into and how those investments perform. There is no may provide return. A money market account inside an IRA might earn 4 to 5 percent annually right now, but that rate changes. A stock fund might earn 8 to 10 percent in a good year and lose money in a bad year. A bond fund might earn 3 to 4 percent. You choose the investments, and you live with the results.

Key Takeaways

  • An IRA is a tax shelter for investments, not an investment itself—the money inside earns returns based on what you buy with it.
  • Money market accounts, CDs, stocks, bonds, and mutual funds all earn differently, and you choose which one to hold inside your IRA.
  • The tax advantage of an IRA is that earnings compound without being taxed each year, which means more money stays invested and working for you.
  • You can change what your IRA money is invested in at any time, and different investments carry different levels of risk and potential return.

How different investments inside an IRA earn money

A money market account or certificate of deposit (CD) inside an IRA earns a fixed interest rate set by the bank. Right now that rate is typically 4 to 5 percent for money market accounts and 4 to 5.5 percent for CDs, depending on how long you lock the money away. These are the safest options—your principal doesn't go down—but the returns are modest and fixed rates change as the Federal Reserve adjusts interest rates.

Bond funds and individual bonds earn interest payments, usually 3 to 5 percent depending on the type and current market conditions. When interest rates rise, existing bond prices fall, and when rates fall, bond prices rise. If you hold a bond to maturity inside an IRA, you get your principal back plus the interest earned. If you sell before maturity, you might get more or less than you paid.

Stock funds and individual stocks earn money two ways: through dividends (cash payments companies make to shareholders) and through price appreciation (the stock going up in value). Dividends might be 1 to 3 percent of the stock price annually, but the real growth comes from the stock price itself rising. Stocks are volatile—they can gain 20 percent in a year or lose 20 percent—but historically they have returned around 10 percent annually over long periods.

Most people hold a mix of these inside an IRA. A common approach is a target-date fund, which automatically holds a mix of stocks and bonds that shifts toward more conservative investments as you approach retirement. You buy one fund and it rebalances itself. Another approach is to build your own mix—maybe 70 percent stocks and 30 percent bonds—and adjust it yourself over time.

Why the tax shelter matters for long-term growth

Imagine you invest $10,000 in a stock fund that earns 8 percent annually. In a regular taxable account, you might owe tax on that $800 gain each year—let's say 20 percent in capital gains tax, so $160 goes to taxes and $640 stays invested. Over 30 years, that difference compounds. In the IRA, all $800 stays invested every single year. That extra $160 per year, reinvested and earning its own returns, adds up to tens of thousands of dollars by retirement.

This is why people prioritize funding an IRA before investing in a regular brokerage account. The tax deferral is the main advantage. You're not getting a higher return on your investments—the stock fund earns the same 8 percent either way—but you're keeping more of it because taxes are deferred or eliminated.

The catch is that you can't touch the money before age 59½ without penalty in most cases. That's the trade-off for the tax benefit. The IRA locks the money away until retirement, which is why it works best for money you won't need for years.

How to choose what to invest in inside your IRA

When you open an IRA with a bank, brokerage, or investment company, you'll see a menu of options. Banks typically offer money market accounts and CDs. Brokerages like Fidelity, Vanguard, and Charles Schwab offer thousands of mutual funds, ETFs (exchange-traded funds), and individual stocks and bonds. You pick what you want to hold, and that's what your IRA money goes into.

If you don't want to pick individual investments, a robo-advisor or target-date fund will do it for you. You tell it your retirement year, and it builds and rebalances a portfolio automatically. This costs less than hiring a human advisor and requires no decisions from you after the initial setup.

If you do want to pick, start by thinking about your timeline. Money you won't need for 30 years can handle stock market volatility and should probably be mostly stocks. Money you'll need in 5 years should be mostly bonds or cash. Your age, other savings, and personal comfort with risk all matter. Many people use a simple rule: hold your age in bonds and the rest in stocks. At 35, that's 35 percent bonds and 65 percent stocks. At 55, it's 55 percent bonds and 45 percent stocks.

What happens when your investments lose money

If the stock market drops 20 percent in a year, your IRA drops 20 percent too if it's all in stocks. That's real. You don't lose the tax benefit—the loss is still sheltered inside the IRA—but your account value goes down. The advantage is that you don't have to sell at the bottom. You can wait for the market to recover, which it historically has done, and you don't pay tax on the recovery when it comes.

In a taxable account, if you sold at a loss to raise cash, you'd lock in that loss and owe tax on any gains you made before the drop. In an IRA, you just hold and wait. This is another reason the tax shelter is valuable—it lets you ride out downturns without the tax complications.

If you're close to retirement and a market drop would force you to sell at a loss to live on, that's a sign your IRA should hold more bonds and less stock. There's no penalty for rebalancing inside an IRA—you can move money between investments as often as you want without tax consequences.

How much you can contribute and when you can withdraw

For 2024, you can contribute up to $7,000 per year to an IRA if you're under 50, or $8,000 if you're 50 or older. That limit changes each year. You can contribute to a traditional IRA or a Roth IRA, but not more than $7,000 total across both types in a single year. You can make contributions until the tax filing deadline the following year, usually April 15.

You can withdraw money from a traditional IRA starting at age 59½ without penalty. If you withdraw before that, you pay a 10 percent penalty plus income tax on the withdrawal. There are exceptions for hardship, disability, and a few other situations, but they're narrow. A Roth IRA lets you withdraw your contributions (the money you put in) at any time without penalty, but earnings stay locked until 59½.

Starting at age 73, you must take required minimum distributions (RMDs) from a traditional IRA each year—the IRS calculates the amount based on your age and account balance. Roth IRAs have no RMD requirement during your lifetime. This is another reason some people prefer Roths: the money can keep growing tax-free indefinitely.

Frequently Asked Questions

Can I move money between different investments inside my IRA without paying tax?

Yes. You can move money from a stock fund to a bond fund, or from one mutual fund to another, as many times as you want inside an IRA without any tax or penalty. The tax shelter covers all the transactions inside the account. This is different from a taxable account, where selling one investment to buy another can trigger capital gains tax.

What's the difference between a traditional IRA and a Roth IRA in terms of how money grows?

The investments grow the same way in both. The difference is when you pay tax. In a traditional IRA, you may deduct contributions from your taxes now and pay tax on withdrawals later. In a Roth, you pay tax on contributions now and withdrawals are tax-free later. For long-term growth, a Roth is usually better because all the earnings are tax-free, but income limits apply to Roth contributions.

If I have $50,000 in an IRA earning 5 percent, how much will I have in 20 years?

Roughly $132,000, assuming the 5 percent return stays constant and you don't add or withdraw money. That's the power of compound growth—your money earns returns, and those returns earn their own returns. In reality, returns vary year to year, so the actual amount will be different, but the long-term math favors staying invested.

Can I lose all my money in an IRA?

Yes, if you invest in stocks and the market crashes severely, or if you invest in a company that goes bankrupt. The IRA itself is insured by the FDIC only if you hold cash or CDs in a bank IRA—not if you hold stocks or mutual funds. This is why diversification matters: holding many different investments reduces the risk that one bad investment wipes you out.

Do I have to pick my own investments, or can someone else manage my IRA?

You can do it yourself, use a robo-advisor (an automated service that picks and rebalances for you), or hire a human financial advisor. You can also use a target-date fund and let it manage itself. There's no requirement to actively manage your IRA—many people set it up once and leave it alone for decades.