What’s the Difference Between a Roth IRA and Savings Account?
A savings account offers easily accessible safekeeping for your rainy-day funds, and deposits are federally insured at most banks or credit unions. You can also stash money for any short-term financial goal, such as a down payment for a house, new furniture, or a home improvement project.
Contribution Limits
Each year, the IRS sets certain contribution limits for Roth IRAs. For example, for tax year 2022, you can contribute up to $6,000, or $7,000 if you’re 50 or older and closer to retirement. There are also contribution limits based on your modified adjusted gross income (MAGI). This could lead to a reduced contribution, or not being allowed to make a contribution. On the other hand, most savings accounts don’t come with contribution limits, meaning you can contribute as much or as little as you’d like. Each account holder at federally insured banks or credit unions receives $250,000 in deposit insurance. If the bank fails, you’ll be able to retrieve your savings. However, if you saved an amount over $250,000 at one bank, that amount is not insured.
Investment Options
Roth IRAs are flexible in that you can invest funds in various vehicles. You may choose stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Savings accounts don’t have the option to invest any money you deposit, but do pay interest, which can increase over time.
Returns
Any investment can fluctuate, and different investments may have widely varying risks and returns. For example, a Roth IRA with more bonds may be less risky than a Roth IRA holding 100% stocks. But since Roth IRAs are geared toward retirement, the benefit of time can leave you with a better chance of higher returns over the course of decades, even if you choose riskier investments. While interest rates for savings accounts vary, expect low returns over the long term compared to many other investments, in exchange for the relative safety of your funds. If you’d like to earn more with a savings account, compare high-yield savings accounts.
Taxes
A Roth IRA requires you to make contributions with your after-tax dollars. You can take distributions of your money tax-free in retirement, although you may pay taxes or penalties if you take the distributions outside of qualifying circumstances. When it comes to your savings account, you will need to pay taxes every year on interest you earn of $10 or more and report it on your annual tax return.
Reap the Benefits of a Roth IRA and Savings Account
Roth IRAs and savings accounts are two powerful yet different financial products. Since a Roth IRA is a great option for retirement savings and a federally insured savings account is ideal for short-term goals and emergencies, consider both. As long as you have income, you can contribute to a Roth IRA, even if you’re in college or in your 20s or 30s. Even if you’re young and retirement seems like a lifetime away, opening a Roth IRA can help you take advantage of the power of compound interest and build a sizable nest egg. Meanwhile, your savings account can ensure a surprise or emergency doesn’t impact your financial stability now.
The Bottom Line
A Roth IRA is a retirement account you make contributions to with your after-tax dollars, can withdraw contributions from tax-free at any time, and get qualified distributions in certain situations. A savings account is a place to store cash you may use for emergency expenses or short-term financial goals. By pairing a Roth IRA with a savings account, you set yourself up for financial success, now and in the future. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
