An individual retirement account (IRA) can be a great place to save and grow your money for retirement. Unlike some accounts, IRAs don't pay a set interest rate.

Instead, IRAs are accounts that hold investments chosen by you. That means your Roth IRA returns depend on the investments you pick for the account—and how they perform.

Key Takeaways

  • Roth IRAs don't earn a specific interest rate. Instead, the returns depend on the investments you hold in the account.
  • You can keep a variety of investments in your Roth IRA, including stocks, bonds, mutual funds, ETFs, and even real estate (but you'll need a self-directed IRA for that last one).
  • Your Roth IRA custodian will send periodic statements that highlight the monthly or annual return your account earns.

Your Roth IRA provider will send you monthly or annual statements that show the account's earnings. And if you have an online account with the provider (or an app), you can check your balance and other details at any time.

Still, it can be helpful to know how to calculate your Roth IRA returns on your own so you can see exactly where your returns are coming from.

A Hypothetical Roth IRA Portfolio

Let’s say you open a Roth IRA at the beginning of the year. Your goal is to save $5,000 by the end of the year. You want to invest monthly, so you divide $5,000 by 12 months and determine you need to save $416.67 per month to reach your savings goal.

Out of each deposit you make into the account, 20% goes into a certificate of deposit (CD), 40% goes into a bond mutual fund, and 40% goes into a stock mutual fund.

You meet your goal and contribute $5,000 by the end of your first year. The statement you receive from your IRA provider shows your portfolio earned a 5.88% return. But how did it come up with that number?

Rates of Return for Each Investment

To understand your total earnings, you need to look at each investment in your account. For our hypothetical example:

  • The return on the CD is 1%. Your $1,000 investment is now worth $1,010.
  • Your $2,000 in the bond fund yields 4.2%. That investment is now worth $2,084.
  • The $2,000 in the stock fund did rather well—10%. You now have $2,200 instead of your original $2,000.

These are the rates of return on each of the three holdings in your account. So far, so good. But that still doesn’t explain that 5.88% total return figure.

How to Calculate Overall Portfolio Return

To calculate the collective return of all three investments, you do the following:

  • Calculate your total contribution (investment). In this case, it's $5,000 ($1,000 + $2,000 + $2,000).
  • Calculate the total current value of your holdings. For our example, it's $5,294 ($1,010 + $2,084 + $2,200).
  • Subtract the original investment from the current value of your investments. In this case, it's $294 ($5,294 – $5,000). This is your return in dollars.
  • To find the overall rate of return for your portfolio, divide your return (in dollars) by your original investment. For our example, your return is 0.0588, or 5.88% ($294 ÷ $5,000).

So there you have it. That’s where the 5.88% return figure came from.

At the beginning of the 12-month period, you had $0 in your account. Now, at the end of the year, you have $5,294. But it’s important to realize that $5,000 of that “growth” in your account came from your deposits—your diligent saving and investing. That money, in turn, earned you $294.

It’s also interesting to consider how each investment performed compared to the overall returns of the portfolio. Your stock mutual fund returned 10%, but the whole account only returned a little over half of that. Why? The lesser returns from the other holdings acted as a drag, especially the CD (which only earned 1%). Good thing it only made up one-fifth of the portfolio. That illustrates the importance of portfolio diversification.

The Bottom Line

It’s good to know how your IRA account is performing overall, and how much return you receive on each specific investment. That way, you can make sure your Roth IRA is on track—and make any changes if needed.

If you need help with the investments in your Roth IRA, it can be helpful (and worth the money) to consult with a trusted financial planner or advisor.