A Roth IRA doesn't earn a fixed interest rate—it earns whatever your investments earn
A Roth IRA is a container for investments, not an investment itself. The money you put in doesn't sit in a savings account earning interest. Instead, you choose what to invest it in—stocks, bonds, mutual funds, or other securities—and your earnings depend entirely on how those investments perform. If you pick a stock fund that gains 8% in a year, your Roth IRA grows by 8%. If you pick a bond fund that gains 2%, it grows by 2%. If the market drops, your balance can drop too.
Some people open a Roth IRA at a bank and choose a money market account or certificate of deposit (CD) as their investment. In that case, you do earn a fixed interest rate—but that rate is set by the bank, not by the Roth IRA rules. A bank CD might pay 4% or 5% right now, but that's the bank's rate, and it changes. The Roth IRA itself has no interest rate.
Key Takeaways
- Your Roth IRA earns returns based on what you invest in—stocks, bonds, funds, or other securities—not from a built-in interest rate.
- If you choose a bank CD or money market account inside your Roth IRA, you earn whatever interest rate that bank product pays, which varies by bank and changes over time.
- You can change your investments at any time without penalty, so you can move money between a low-interest savings option and a stock fund as your situation changes.
- The tax-free growth inside a Roth IRA is the real advantage—whatever your investments earn, you pay no federal income tax on those earnings when you withdraw them in retirement.
How investment choices affect what you earn
The earnings in your Roth IRA depend on the risk and type of investment you choose. A stock index fund historically returns around 10% per year on average over long periods, but that average includes years with 20% gains and years with 30% losses. A bond fund might return 3% to 5% per year with smaller swings up and down. A money market account at a bank might return 4% to 5% right now, but that rate is may provide only for the term of the account—often three months to five years.
You don't have to pick one investment and stick with it. You can hold a mix—some in stocks, some in bonds, some in a cash account—and rebalance whenever you want. Moving money between investments inside your Roth IRA never triggers a tax bill, even if you sell at a gain. That flexibility means you can adjust your strategy as you get older, as market conditions change, or as your comfort with risk changes.
Where to open a Roth IRA and what your options are
You open a Roth IRA through a financial institution: a brokerage firm, a bank, a credit union, or a robo-advisor platform. Each offers different investment choices and different interest rates on cash products. Fidelity, Vanguard, and Charles Schwab are large brokerages that offer thousands of mutual funds and stocks. Your bank offers CDs and money market accounts. A robo-advisor like Betterment or Wealthfront automatically builds and rebalances a portfolio of low-cost index funds based on your age and risk tolerance.
If you want the simplest option with the least decision-making, a robo-advisor or a target-date fund (a single fund that automatically shifts from stocks to bonds as you approach retirement) requires you to pick once and then leave it alone. If you want to chase higher returns and are willing to research individual stocks or funds, a full-service brokerage gives you that freedom. If you want may provide returns with no market risk, a bank CD inside a Roth IRA locks in a rate—but that rate is usually lower than what you could earn in a diversified stock portfolio over decades.
The real advantage: tax-free growth over time
The earnings in your Roth IRA grow tax-free. If you invest $7,000 at age 30 and it grows to $100,000 by age 65, you owe no federal income tax on that $93,000 in gains when you withdraw it. With a traditional IRA or a taxable brokerage account, you would owe income tax on those earnings. That tax-free compounding is why a Roth IRA is powerful even if the interest rate or investment return seems modest.
Over 35 years, even a 6% average annual return compounds to roughly 10 times your starting balance. A 10% return compounds to roughly 28 times your starting balance. The difference between 6% and 10% is enormous over decades, but both are tax-free inside the Roth. That's why the type of investment you choose matters far more than the interest rate on a savings account.
What happens if you want to move your money
You can move your Roth IRA from one financial institution to another without penalty or tax consequences. This is called a trustee-to-trustee transfer. If your current provider offers low returns or high fees, you can move to a brokerage with lower-cost index funds or better investment options. The transfer itself takes one to two weeks and doesn't count as a withdrawal, so it doesn't affect your contribution limits or trigger any tax bill.
You can also withdraw money from your Roth IRA under certain rules. You can always withdraw the money you contributed (not the earnings) without penalty. You can withdraw earnings tax-free if you're 59½ and have held the account for at least five years. If you withdraw earnings before 59½, you owe income tax on those earnings plus a 10% penalty—with some exceptions for first-time home purchases, disability, or medical expenses. Understanding these withdrawal rules matters because they affect how much you should invest in growth-oriented options versus safer options.
Comparing interest rates and returns across providers
If you're comparing Roth IRA providers, look at three things: the investment options available, the fees charged, and (if you're using a cash product) the interest rate offered.
| Provider Type | Investment Options | Typical Fees | Cash Interest Rate |
|---|---|---|---|
| Full-service brokerage (Fidelity, Vanguard, Schwab) | Thousands of stocks, bonds, mutual funds, ETFs | $0 to $50 per year; most funds charge 0.03% to 0.20% annually | 4% to 5% on money market accounts |
| Bank | CDs, money market accounts, sometimes mutual funds | $0 to $100 per year | 4% to 5.5% on CDs and money market accounts |
| Robo-advisor (Betterment, Wealthfront) | Diversified portfolio of low-cost index funds | 0.25% to 0.50% annually | Varies; some offer 4% to 5% on cash sweep |
| Credit union | CDs, money market accounts | $0 to $50 per year | 3% to 5% on CDs and money market accounts |
The interest rate on a bank CD is fixed for the term you choose—three months, one year, five years. Once that term ends, the rate resets and may be higher or lower. Money market accounts have variable rates that change with the Federal Reserve's interest rate decisions. If you're comparing a 5% CD to a stock fund that historically returns 8% to 10%, remember that the CD is may provide but the stock fund can lose value in down years. Your choice depends on how long you can leave the money untouched and how much risk you can handle.
Frequently Asked Questions
Can I move my money from a CD to a stock fund inside my Roth IRA without paying taxes?
Yes. Moving money between investments inside your Roth IRA never triggers a tax bill, even if you sell at a gain. You can move from a CD to a stock fund, or from one fund to another, as many times as you want. The only restriction is that you can only contribute a certain amount per year—moving money around doesn't count as a new contribution.
What's the difference between a Roth IRA at a bank and a Roth IRA at a brokerage?
A bank Roth IRA typically offers CDs and money market accounts with fixed or variable interest rates. A brokerage Roth IRA offers stocks, bonds, mutual funds, and ETFs. Banks are simpler if you want may provide returns; brokerages offer more options if you want to build a diversified portfolio. You can hold the same Roth IRA at either type of institution.
If I earn 8% in my Roth IRA, do I owe taxes on that 8%?
No. All earnings inside a Roth IRA—whether from interest, dividends, or capital gains—are tax-free. You owe no federal income tax on those earnings when you withdraw them in retirement, as long as you follow the withdrawal rules (age 59½ and five-year holding period for earnings).
Should I put my Roth IRA in a CD or a stock fund?
That depends on your age, how long you can leave the money untouched, and your comfort with market swings. If you're young and won't need the money for 30+ years, a stock fund historically outpaces a CD over that timeframe, even accounting for down years. If you're close to retirement or need the money in five years or less, a CD or bond fund reduces the risk of losses. Many people use a mix of both.
Can I change my investment choice after I open my Roth IRA?
Yes, at any time. You can move money between investments without penalty or tax consequences. This flexibility means you can start conservative and shift to more growth-oriented investments, or vice versa, as your situation changes.