How to Calculate the Annual Percentage Yield on an IRA Account
Original post by Mark Kennan of Demand Media
The annual percentage yield, or APY, measures the effective rate of return on any investment. Calculating the annual percentage yield for your IRA requires that you know the initial amount invested in the IRA, the final value of the IRA and the time over which you earned your return. By using an annual percentage yield rather than the raw return, you get two benefits. First, the return is measured in relationship to the amount invested so you can compare IRAs of different values. Second, it calculates an annual return, so you can compare IRAs held for different periods of time.
Divide the ending value of your IRA account by the amount you started with in your IRA. For example, if you invested $4,000 and over three years it grew to $4,950, divide $4,950 by $4,000 to get 1.2375.
Calculate the Yth root of the result, where Y equals the number of years it took to generate the returns in your IRA. Alternatively, you can raise the result to the 1/Yth power, the answer will be the same. In this example, calculate the third, or cube, root of 1.2375 to get 1.073614585.
Subtract 1 from the result to find the APY on your IRA expressed as a decimal. In this example, subtract 1 from 1.073614585 to get 0.073614585.
Multiply the APY on your IRA expressed as a decimal by 100 to find your APY on your IRA account for the specified time period. In this example, multiply 0.073614585 by 100 to find the APY equals about 7.36 percent.
- Standford University; CAGR (Compound Annual Growth Rate); Michael Fan; 2006
- DePaul University: Compound Interest Formula
- Math is Fun: Fractional Exponents
About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.