Individual retirement accounts (IRAs) are often recommended by financial experts. They allow you to save for retirement, while also saving on taxes. Your contributions are tax-deductible, and you only pay taxes when you withdraw your money in retirement.
Before you open one, you may want to know what kind of results you can expect. For an idea of that, let’s look at how much $10,000 could grow in an IRA.
What kind of returns do IRAs offer?
To figure out how much you could earn with an IRA, we need to estimate how much your annual return will be. That depends on how you invest the money you deposit. If you simply parked $10,000 in an IRA, nothing would happen. After you deposit your money, you also need to invest it.
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The great thing about IRAs (besides the tax savings) is that they let you buy almost any type of investment. They’re not like 401(k) plans, where you have limited investment options. With an IRA, you can invest in anything your broker offers, which likely includes:
Most investors go with a combination of stocks and bonds. Some buy individual stocks and bonds themselves, but it’s more common to buy mutual funds or target-date funds that do the work for you.
As far as returns go, the average stock market return is about 10% per year. The average annual return for bonds is about 6%. While returns vary from year to year, if you invest your money for a long time period, there’s a good chance you’ll get returns in the 6% to 10% range.
Here’s how much you could earn with $10,000 in an IRA
So, let’s say you put $10,000 into an IRA. Just so you know, you’d need to do this over two years. IRAs have annual contribution limits, and in 2024, the limit is $6,000 (or $7,000 if you’re 50 or older).
You’d be able to deduct those contributions on your income taxes in the years you made them. If that money would’ve been taxed at 22%, then $10,000 in total contributions effectively saves you $2,200 in taxes.
The table below shows how much that would grow over 10, 20, and 30 years, depending on the annual return you get.
| Time | 6% Annual Return | 8% Annual Return | 10% Annual Return |
|---|---|---|---|
| 10 years | $17,908 | $21,589 | $25,937 |
| 20 years | $32,071 | $46,610 | $67,275 |
| 30 years | $57,435 | $100,627 | $174,494 |
Data source: Author’s calculations.
Over long periods, investing is a powerful way to build wealth. Just look at the 30-year growth. If you get 8% per year, you end up with 10-times as much money. At a 10% annual return, you have over 17-times as much as you started with.
The results also demonstrate how much investment performance matters. That’s why it’s best to invest heavily in stocks while you’re young, so you can maximize growth. Until you’re within about 10 years of retirement, keep most of your portfolio in stocks, not bonds.
Make investing a habit for even better results
Investing can help you build quite a bit of wealth, even if you make a one-time investment and simply leave it alone from there. But you’ll earn more if you make investing part of your routine. A good way to do this is to invest a portion of your income, such as 10%, every month.
Let’s say you have $10,000 in an IRA. You also contribute $500 per month, which comes out to $6,000 per year. You get an 8% annual return — a reasonable estimate. Here’s how much money you’d make:
- After 10 years, you’d have $115,462.
- After 20 years, you’d have $343,147.
- After 30 years, you’d have $834,702.
Keep in mind that after 30 years, you’ll have contributed $190,000. The other $644,702 is money made from interest and compound interest.
An IRA is one of many ways to save for retirement. A 401(k) plan is also a good idea, if you have that option through your employer. What’s important is that you’re putting away money for retirement through tax-advantaged accounts. If you do that and invest well, you’ll be financially ready when you want to call it a career.
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