You might wonder what the average return rate is for a Roth IRA, but there’s no average return because this retirement account can earn money in a number of ways depending on your investment choices. Your return with your own IRA could be significant or minimal, or you might even suffer losses.
What Determines Roth IRA Return Rates?
A Roth IRA is like an empty basket. You choose what investments to put into it. Your rate of return will depend on which investments you choose. Your Roth IRA return rate will depend on what you’re invested in, just as with any other brokerage account. This means that your returns could vary widely. You could use your Roth IRA to hold short-term bonds with modest returns or aggressive stocks that can yield larger gains but that could also result in losses.
Average Return Rates for Common Roth IRA Investments
You can include a number of investment types in your Roth IRA, even farmland and racehorses. But investors more commonly hold stocks and bonds. One way to invest in these assets is to choose a fund that follows an index. You could invest in a fund that mirrors the S&P 500 to try to achieve the same returns. Let’s look at some average rates of return on common stock and bond indices for a general sense of what returns you can expect with your Roth IRA investments.
The S&P 500
The S&P 500 is a weighted average of the stock prices for 500 large U.S. companies. It’s commonly used as a benchmark for the broader market.
The Dow Jones Industrial Average
The Dow Jones Industrial Average, or “The Dow,” is a stock market index of U.S. blue chip stocks representing nine sectors of the economy, from consumer goods to technology. The index was founded in 1896 and has generated a lifetime average annual return of 9.68% as of Nov. 30, 2022. The Dow’s average rate of return has been about 7.32% over the last five years.
The Nasdaq Composite
The Nasdaq Composite was founded in 1971. It represents a weighted average of the more than 3,000 companies that are listed on the Nasdaq stock market. This index had a lifetime average annual return rate of around 10.75% as of Nov. 30, 2022. Its 10-year average annual return rate was 15.38% as of that date. This index provides slightly higher returns than the S&P 500, but it’s also more volatile.
Bond Funds
Bonds are a form of debt that’s sold by companies and governments. Just as with stocks, you can get exposure to several bonds at once by buying into a bond fund that tracks a bond index. The Bloomberg U.S. Treasury 1-5 Year Index holds bonds with maturities of between one and five years. As of Nov. 30, 2022, it has gained a lifetime annual average of 2.05% per year since it began. The Fidelity Short-Term Treasury Bond Index Fund aims to track those returns, with at least 80% of its holdings invested in securities that are included in the Bloomberg index.
Average Roth IRA Interest Rates
Many banks and credit unions offer a Roth IRA savings account. This is essentially a Roth IRA that holds a savings account rather than investments. Your funds will earn the savings account interest rates and you’d be covered against losses of up to $250,000 with FDIC insurance. But there are downsides to these accounts. Savings accounts generally return significantly less than you could make with other investment choices like stocks and bonds. The rate of return isn’t likely to keep up with inflation rates, so you could lose money.
How To Increase Your Roth IRA Rate of Return
No matter what investments you choose, you can aim to increase your return with different strategies. Here are some common strategies to improve your investing profits:
Hire an investment professional: Hiring an investment advisor can potentially help you earn more and avoid costly errors if you’re not confident about how to manage your money yourself. DIY your retirement investments: You can make your investing decisions alone and save on the costs of hiring an advisor if you’re an experienced investor. Invest in index funds: Rather than picking and choosing each stock, you can invest in an index fund that holds multiple stocks. Index funds can improve your diversity and you can choose one based on your risk tolerance level. Shift your investment allocation as you age: Most financial advisors recommend investing more aggressively while you’re young, then changing your allocation so that you’re invested more conservatively when you’re older.
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
