How Does an IRA Grow Over Time?

IRA Growth Over Time

Like all other types of investments, IRAs have the potential to grow over time. The two primary ways an IRA can grow is through annual contributions and investment appreciation. However, there are limits to the annual contribution amounts allowed, and not all investments are successful in the long-term.

Key Takeaways

  • IRA growth depends on its underlying investments, how much money is invested, and how much is contributed each year.
  • In 2022, contributions into traditional and Roth IRAs are limited to $6,000 per year ($7,000 for individuals age 50 or older).
  • In 2023, contributions into traditional and Roth IRAs are limited to $6,500 per year ($7,500 for individuals age 50 or older).
  • Investors fund traditional IRAs with pretax dollars and Roth IRAs with post-tax dollars.
  • At age 73 (for people born between 1951 and 1959) or age 75 (for those born in 1960 or later), traditional IRA owners must take the required minimum distributions.

How Contributions Affect Growth

Individual retirement account (IRA) growth depends on many factors. It relies heavily on the amount of money invested and how much risk the investor will assume, which shapes the types of investments included in the account. Making regular contributions to the account also has a dramatic effect on the performance.

One big factor that determines the growth of an IRA are annual contributions. In 2022, IRA contributions are limited to $6,000 a year. In 2023, IRA contributions are limited to $6,500. There is also a $1,000 catch-up contribution if you are age 50 or over.

If $6,000 is invested annually in an IRA at a return of 5% after 30 years, the account would be worth over $400,000. A very critical part of this assumption is consistent, maximum contributions. Consider that over these 30 years, $180,000 of personal contributions would have to be made.

The IRS often allows for IRA contributions for a given year to be made around tax day of the following year. For example, as long as your account is open in advance, you may make 2022 IRA contributions until April 18, 2023.

The Magic of Compounding

Of course, to beat inflation, it is necessary to invest in higher-risk investment vehicles, such as individual equities, index funds, or mutual funds. IRAs can invest in a range of securities offered by various entities: public corporations, general partnerships (GPs), limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs).

Investments held in IRAs that are related to these entities include stocks, corporate bonds, private equity, and a limited number of derivative products. Not every investment is eligible for an IRA (e.g., antiques or collectibles, life insurance, and personal-use real estate).

Stocks are a popular choice for IRAs because the earnings gained are basically extra contributions to the IRA. Stocks also grow IRAs through dividends and increases in the share price.

For example, by investing $6,000 a year in a stock index fund for 30 years with an average 10% return, you could see your account grow to over $1 million (though be aware of the impact of investment fees). With such great potential to grow funds consistently over time with the magic of compounding, it is clear why stocks are almost always featured in IRA accounts. 

Higher-risk investments, such as stocks, help grow IRAs most dramatically. More stable investments, such as bonds, are often included in IRAs for diversification and to balance out the equities' volatility with a stable income.

Roth vs. Traditional IRA

The main difference between the two kinds of IRAs is whether you want to fund your IRA with pre- or post-tax dollars. A traditional IRA is funded with pre-tax dollars. When you retire and access funds in a traditional IRA, you are responsible for paying income tax on the funds.

A Roth IRA is funded with after-tax dollars, and any contributions made are not subject to taxes when withdrawn. Contribution limits for Roth and traditional IRAs are the same.

If you opt for a traditional IRA, you must begin taking required minimum distributions (RMDs) by April 1 the year following the year you turn 73 (75 for anyone born in 1960 or later). Beneficiaries are also subject to the RMD rules if they inherit a traditional IRA. Non-spousal beneficiaries who inherit Roth IRAs are also subject to RMD rules.

To get tax advantages of both a Roth IRA and a traditional IRA, consider opening both types of accounts and contributing to each. The total amount you contribute to both combined cannot exceed IRS limits, but there are not rules preventing ownership and contributions into both in a single year.

Opening an IRA

An IRA can be opened through a financial institution, such as a brokerage, mutual fund company, insurance company, or bank. IRAs can also be opened through online brokerages. The major difference between most IRA providers lies in what they charge for their services.

Just about any wage-earner can set up an IRA. Employers or self-employed individuals who want to establish retirement plans for themselves or their employees often consider simplified employee pension individual retirement accounts (SEP IRA). SEPs have lower costs for setup and maintenance than traditional retirement plans do.

How Quickly Does an IRA Grow?

How quickly an IRA grows is directly depends on the annual contributions and the underlying investments. By maximizing annual contributions, an IRA will have greater opportunity for capital appreciation and compounding over the long-term. By selecting riskier investments, an IRA may experience larger returns, though at potentially higher risk of loss of capital.

Do IRAs Grow Exponentially?

Very broadly speaking, IRAs are designed to grow exponentially. This assumes a consistent rate of return for a portfolio, consistent annual contributions into the account, and a long-term horizon to save money. At its very basic, an IRA most often grows over time and experiences compounding, allowing investors to have dividends re-invested into their IRA to help further generate more dividends in the future.

Why Is My IRA Not Growing?

There's two primary reasons your IRA may not be growing. First, you can only contribute a certain amount of money into your IRA each year. Once you hit that limit, your account cannot grow via personal contributions until the following year. This may also mean you are not making contributions when you believe you were.

Second, investments held within an IRA often do not guarantee future performance. Investments may decrease in value, causing an unrealized loss of capital. As your investments fluctuate in value, the total balance of your IRA may increase or decrease.

The Bottom Line

Few investment vehicles are as versatile as IRAs. Many options are available for investors to personalize accounts to help reach their financial goals, and thanks to compounding interest, IRAs will continue to grow even if you are unable to fund them every single year.

A valuable tool for investors of any experience level, IRAs offer the flexibility to be hands-on or to leave the choices to the professionals. With so many options for funding IRAs and the probability for high returns, it is no surprise that in mid-2021, 37% of U.S. households owned individual retirement accounts (IRAs) and 28% of U.S. households owned traditional IRAs.

Article Sources
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  2. Internal Revenue Service. “Traditional and Roth IRAs.”

  3. U.S. Congress. "H. R. 2617," Page 831.

  4. Internal Revenue Service. "IRA Year-End Reminders."

  5. Internal Revenue Service. "IRA FAQs."

  6. Internal Revenue Service. "IRA-Based Plans."

  7. Internal Revenue Service. "Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs)."

  8. Internal Revenue Service. "IRS Reminds Those Over Age 72 to Start Withdrawals From IRAs and Retirement Plans to Avoid Penalties."

  9. Internal Revenue Service. "Publication 590-B, Distributions for Individual Retirement Arrangements (IRAs)."

  10. Internal Revenue Service. "SEP Plan FAQs."

  11. Investment Company Institute. "The Role of IRAs in US Households’ Saving for Retirement, 2021," Page 1.

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