There's nothing about an IRA that dictates whether your money will grow or not. It depends on how you invest the money in the IRA. You can invest for growth before retirement to build up your funds. You can switch to investing for income or safety any time you want. Such a switch can reduce the amount of growth your IRA experiences. If you want your IRA to grow, you must choose growth-oriented investments.
So-called growth stocks offer you the chance to increase the value of your IRA. Often, growth stocks do not pay dividends because the company reinvests all its profits in growing the business instead of paying profits out to shareholders. As the company grows, the value of the stock grows and this can raise the value of your investment in an IRA.
Stock Mutual Funds
If you don't want to buy individual stocks, you can buy shares in a stock mutual fund instead. A fund that focuses on growth stocks can increase the value of your IRA. The fund manager makes stock selections for the mutual fund based on the potential for growth. You get the protection of diversification, meaning that because the fund owns so many stocks, if a few go down in value the others might make up for it. If your growth fund is successful, your IRA will be worth more over time.
Bonds and Bond Funds
You earn interest from bonds and bond funds. While bonds can grow in value, the primary reason to invest in them is for income. If you spend that income, you won't have much growth. However, if you reinvest that income into more bonds or more shares of a bond fund, you can grow the value of your IRA. Reinvesting bond income can give you growth while protecting your money from the ups and downs of the stock market. In addition, if interest rates drop below the rate your bonds pay, your bonds can go up in value because investors will find the higher interest rate more attractive. However, bonds can lose money. This happens if interest rates rise above what your bonds pay. In such a scenario, investors will devalue your bonds because the bonds don't pay as much as investors can get from new bonds.
Money Market Funds
A money market fund in your IRA pays you interest. If you leave your interest payments in the fund instead of taking them out, you'll earn interest on your interest. That's because these funds calculate interest based on your balance. As your balance rises from previous payments, you get more interest. This can offer you some growth in your IRA. Money market funds seldom pay as much as bonds or bond funds, but they also seldom go down in value.
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- U.S. News & World Report: Best Large Growth Mutual Funds
- American Association of Individual Investors: Why Bond Prices Go Up and Down
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