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Roth IRA vs Savings Account: Key Similarities and Differences

By Rebecca Lake · January 25, 2023 · 12 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Roth IRA vs Savings Account: Key Similarities and Differences

Saving is an important part of your financial health and building wealth, but it can be confusing to understand all the different vehicles out there. For instance, if you want to stash cash away for a good long while, should you open a Roth IRA or a savings account?

A Roth Individual Retirement Account (IRA) offers a tax-advantaged way to invest money for retirement. Brokerages and banks can offer Roth IRAs for investors who want to set aside money that they don’t anticipate spending for the near future.

Savings accounts can also be used to hold money you plan to spend at a later date. The main difference between a Roth IRA and savings account, however, lies in what they’re intended to be used for.

If you’re debating whether to keep your money in a Roth IRA or savings account, it’s helpful to understand how they work and what sets them apart from one another. Read on to learn:

•   What is a savings account?

•   What are the pros and cons of a savings account for retirement?

•   What is a Roth IRA?

•   What are the pros and cons of a Roth IRA for retirement?

•   What are the similarities and differences between these two account types?

•   How can you tell if a savings account or Roth IRA is right for you?

What Is a Savings Account?

A savings account is a type of deposit account that can be opened at a bank, credit union, or another financial institution. Savings accounts are designed to help you separate money you plan to spend later from money you plan to spend now.

Here’s how a savings account works:

•   You open the account and make an initial deposit.

•   Money in your account can earn interest over time, at a rate set by the bank.

•   When you need to spend the money in your savings account, you can withdraw it.

Previously, savers were limited to making six withdrawals from a savings account per month under Federal Reserve rules. In 2020, the Federal Reserve lifted that restriction, though banks can still impose monthly withdrawal limits on savings accounts. Exceeding the allowed number of withdrawals per month could trigger a fee or could lead to the account being converted to a checking account.

Types of Savings Accounts

Banks can offer more than one kind of savings account. The range of savings accounts available can depend on whether you’re dealing with a traditional bank, an online bank, or a credit union.

Typically, these accounts will be insured up to $250,000 per ownership category by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Generally, the types of savings accounts you can open include:

•   Traditional savings. Traditional savings accounts, also called regular, basic, or standard savings accounts, allow you to deposit money and earn interest. Rates for traditional savings may be on the low side, and you might pay a monthly fee for these accounts at brick-and-mortar banks.

•   High-interest savings. The main benefits of high-interest savings accounts include above-average interest rates and low or no monthly fees. For example, online banks can offer high-yield savings accounts with rates that are five to 10 times higher than the national savings rate, with no monthly fee.

•   Money market savings. Money market savings accounts or money market accounts can combine features of savings and checking. For example, you can earn interest on deposits but have access to your money via paper checks or a debit card.

•   Specialty savings. Some types of savings accounts are created with a specific purpose in mind. For example, Christmas Club accounts are designed to help you save money for the holidays. A Health Savings Account (HSA) is a tax-advantaged specialty savings account that’s meant to be used just for health care expenses, though some people use an HSA for retirement.

You could also add certificate of deposit accounts (CDs) to this list, though a CD works differently than a savings account. CDs are time deposits, meaning that when you put money in the account, you agree to leave it there for a set term. If you take the funds out before then, you will likely be charged a fee.

Once the CD matures, you can withdraw your initial deposit and the interest earned. For that reason, CDs offer less flexibility than other types of savings accounts.

Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Pros and Cons of Using a Savings Account for Retirement Savings

Savings accounts can be used to save for a variety of financial goals, including retirement. You might be wondering whether it makes a difference if you use, say, a high yield savings account vs. Roth IRA or other retirement account to save, as long as you’re setting money aside consistently.

While savings accounts can offer convenience and earn interest, they’re not necessarily ideal when saving for retirement if your primary goal. Here are some of the advantages and disadvantages of using a savings account to plan for retirement.

Pros

Cons

Savings accounts are easy to open and typically don’t require a large initial deposit. A savings account does not offer any tax benefits or incentives for use as a retirement account.
Banks and credit unions can pay interest on savings account deposits, allowing you to grow your money over time. Interest rates for savings accounts can be low, especially if you’re saving at a traditional bank vs. an online bank.
You can withdraw money as needed and don’t have to reach a specific age in order to use your savings. Banks can impose fees or even convert your savings account to checking if you’re making frequent withdrawals.
Savings accounts are safe and secure; deposits are protected up to $250,000 per depositor, per account ownership type, per financial institution when held at an FDIC member bank. If you’re putting all of your retirement funds into the same savings account, it’s possible that your balance might exceed the FDIC covered limit.

Recommended: Different Ways to Earn More Interest on Your Money

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What Is a Roth IRA?

Before diving into what is a Roth IRA, know this: There are different retirement plans to choose from, including workplace plans and IRAs. A Roth IRA is an individual retirement account that is not a traditional IRA. Traditional IRAs are funded with pre-tax dollars and allow for tax-deductible contributions when doing taxes. Once you turn 72, you’re required to begin taking money from this kind of account.

If you don’t know how the Roth IRA works, these accounts allow you to set aside money using after-tax dollars, up to the annual contribution limit. That means you can’t deduct contributions to a Roth IRA, but you can get something better: tax-free qualified distributions.

You can leave money in your Roth IRA until you need, which allows it even more time to grow. Unlike traditional IRAs, there are no required minimum distributions for Roth IRAs. If you don’t use all of the money in your Roth IRA in retirement, you can pass it on to anyone you’d like to name as your beneficiary.

The IRS allows you to make a full contribution to a Roth IRA if you’re within certain income thresholds, based on your tax filing status. The full contribution limit for 2022 is $6,000, with an additional $1,000 catch-up contribution allowed if you’re age 50 or older. You can make a full contribution for 2022 if your tax status is:

•   Married filing jointly or a qualified widow(er) with a modified adjusted gross income of less than $204,000

•   Single, head of household, or married filing separately and did not live with your spouse during the year with a modified adjusted gross income of less than $129,000

Contributions are reduced once you exceed these income thresholds. They eventually phase out completely for higher earners.

Opening a retirement account like a Roth IRA can be a simple, straightforward process. It can even be done online.

Pros and Cons of Using a Roth IRA for Retirement Savings

Roth IRAs are specifically designed to be used for retirement saving. Again, that’s the chief difference between a Roth IRA and savings account. That doesn’t mean, however, that a Roth IRA is necessarily right for everyone. For example, you may need to weigh whether a Roth IRA or traditional IRA is better, based on your income and tax situation.

Here are some of the advantages and disadvantages associated with choosing a Roth IRA for retirement savings.

Pros

Cons

Money in a Roth IRA can be invested in stocks, mutual funds, and other securities, potentially allowing your money to grow faster. Investing money in the market is riskier than stashing it in a savings account; there’s no guarantee that you won’t lose money in a Roth IRA.
You may be able to open a Roth IRA with as little as $500 or $1,000, depending on the brokerage or bank you choose. Brokerages can charge various fees for Roth IRAs. Individual investments may also carry fees of their own.
Qualified distributions from a Roth IRA are always 100% tax-free, and you can withdraw original contributions at any time, without a penalty. Tax penalties may apply if you withdraw earnings from your Roth IRA less than five years after you opened it.
You can save money in a Roth IRA in addition to contributing money to a 401(k) plan at work. Not everyone is eligible to open a Roth IRA, and there are annual contribution limits.

Similarities Between a Roth IRA and a Savings Account

Roth IRAs and savings accounts do have some things in common. For example:

•   Both can be used to save money for the long-term and both can earn interest. So you could use either one as part of a retirement savings strategy.

•   You can open a Roth IRA or savings account at a bank and initial deposits for either one may be relatively low. Some banks also offer Roth IRA CDs, which are CD accounts that follow Roth IRA tax rules.

•   Savings accounts and Roth IRAs held at banks are also FDIC-insured. The FDIC insures certain types of retirement accounts, including Roth IRAs, when those accounts are self-directed and the investment decisions are made by the account owner, not a plan administrator.

•   It’s possible to open a savings account for yourself or for a child. Somewhat similarly, you can also open a Roth IRA for a child if they have income of their own but haven’t turned 18 yet.

When comparing the benefits of Roth IRA vs. savings account, however, Roth accounts have an edge for retirement planning. Whether it makes sense to choose something like a high yield savings accounts vs. Roth IRA can depend on what you want to set money aside for.

Roth IRA vs Savings Account: Key Differences

Comparing a savings account vs. Roth IRA isn’t that difficult once you understand how each one works and what they’re intended to be used for. Here are some important differences between a Roth IRA and a savings account:

Roth IRA

Savings Account

Purpose A Roth IRA is designed to save for retirement. Savings accounts can fund virtually any short- or long-term goal.
Who Can Open Taxpayers who are within certain income thresholds can open a Roth IRA. Adults with valid proof of ID can open a savings account, regardless of income or tax status.
Interest Money in a Roth IRA earns compounding interest based on the value of underlying investments. Savings accounts earn interest at a rate set by the bank.
Tax Benefits Roth IRAs allow for 100% tax-free qualified distributions, with no required minimum distributions. Savings accounts don’t offer any tax benefits; interest earned is considered taxable income.
Contribution Limits Roth IRAs have an annual contribution limit. For 2022, the limit is $6,000 or $7,000 if you’re 50 or older.) There are no contribution limits, though FDIC protection only applies to the first $250,000 per depositor, per account ownership type, per financial institution.
Withdrawals Generally, withdrawals of earnings are not allowed before age 59 ½ unless an exception applies. Original contributions can be withdrawn at any time without a tax penalty. Banks can limit the number of withdrawals you’re allowed to make from a savings account each month and impose a fee for exceeding that limit.
Risk Investing money in a Roth IRA can be risky; you may lose money. Savings are safe, secure places to keep up to the FDIC-insured $250,000 limit detailed above.

How to Decide If a Roth IRA or Savings Account Is Right for You

If you’re unsure whether to open a Roth IRA vs. high-yield savings account, it’s helpful to consider your goals and what you want to do with your money.

You might decide to open a Roth IRA if you:

•   Specifically want to save for retirement and earn a higher rate of return

•   Would like to be able to withdraw money tax-free to buy a home or pay higher education expenses (the IRS allows you to avoid a tax penalty for these distributions)

•   Want to supplement the money you’re contributing to a 401(k) at work

•   Expect to be in a higher tax bracket at retirement and want to be able to withdraw savings tax-free

•   Don’t want to be required to make minimum distributions at age 72

On the other hand, you might open a savings account if you:

•   Have a short- or long-term goal you’re saving for

•   Want a safe, secure place to keep your money

•   Are satisfied with earning a lower rate of return on savings

•   Need to be able to keep some of your money liquid and accessible

•   Aren’t concerned with getting any type of tax break for your savings

The good news is that you don’t have to choose between a high-interest savings account vs. Roth IRA. You can open one of each type of account to save for both retirement and other financial goals.

The Takeaway

Opening a retirement account can be a smart move if you’d like to save money for your later years while enjoying some tax breaks. A Roth IRA could be a good fit if you’re eligible to open one and you’d like to be able to make tax-free withdrawals once you retire.

Having a savings account is also a good idea if you’re building an emergency fund, saving for a vacation, or planning for another big money goal. When you open a SoFi online bank account with direct deposit, you can get checking and savings in one convenient place. You’ll earn a competitive APY and pay no account fees, which can help your money grow faster. You’ll also have access to a suite of simple tools that can make budgeting and socking away savings even easier.

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FAQ

Is it better to put money in savings or a Roth IRA?

A savings account can be better for setting aside cash you know you’ll eventually need to spend. A Roth IRA, on the other hand, can be better for saving for retirement if you’d like to invest your money to earn higher returns and gain some tax benefits.

Should I use a Roth IRA as a savings account?

While you could use a Roth IRA as a savings account, that could be problematic if you need to make a withdrawal. Generally, the IRS expects you to wait until age 59 ½ to withdraw money from a Roth IRA. Withdrawing money before then could trigger tax penalties.

What is the downside of a Roth IRA?

The main downside of a Roth IRA is that not everyone can open and contribute to one. If your income is above the thresholds allowed by the IRS, you’d only be able to open a traditional IRA instead. It’s possible, however, to convert traditional IRA funds to a Roth IRA, though that can result in a tax bill at the time of the conversion.

Can I move money from savings to a Roth IRA?

You can link a savings account to a Roth IRA to transfer funds. If you’d like to move money from savings to your Roth account, you’d just log into your brokerage account and schedule the transfer. Keep in mind that Roth IRAs do have annual limits on how much you can contribute.

Are Roth IRAs Insured?

The FDIC insures Roth IRAs held at banks when those accounts are self-directed vs. a plan administrator being responsible for making investment decisions. The same FDIC insurance limits that apply to savings accounts apply to Roth IRAs.


Photo credit: iStock/dima_sidelnikov

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 3.75% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 2.50% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 12/16/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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