IRA contributions and investment benefits reinvested in the account yield an annual return of between 7% and 10% each year the money remains in the account, regardless of whether you contribute or not. While long-term savings in a Roth IRA may result in better after-tax returns, a traditional IRA can be an excellent alternative if you qualify for a tax deduction. While individual investments within a Roth IRA can accrue interest at different interest rates, you can usually calculate the annual rate of return of a Roth IRA using the tools provided by the company that owns your IRA and see how interest has increased. The main determinants of your interest rate, defined in this case as the total annual growth you see in your Roth IRA portfolio, include any published interest rate for your money market accounts or your IRA CDs.
But how specifically does a Roth IRA work? How does it grow over time? Your contributions help, but it's the power of capitalization that does the heavy lifting when it comes to building wealth with a Roth IRA. In this way, Roth IRAs are the opposite of traditional tax-deferred or 401 (k) IRAs; with those accounts, you'll have to pay taxes when you withdraw the funds. Roth IRAs are also subject to income restrictions, so check if your income is too high to contribute that much to a Roth IRA.