What is a retirement savings account?

Save with a purpose by setting aside money in a retirement savings account.

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There are many retirement plans and investment vehicles that can help you save for retirement, but none are as straightforward as savings within a retirement account. These accounts are designed to help you put more money aside with advantages like employer benefits, tax incentives, withdrawal penalties and more. Plus, they’re easy to open and don’t require any investment knowledge or portfolio managers.

Types of retirement savings accounts

The setup of a retirement savings account is similar to a standard savings account as well as a retirement account intended for more complex investment vehicles. What’s different is where you put your money within the retirement savings account, and you usually also get employer benefits and tax advantages in exchange for limitations on how and when you can access your money. Like other deposit accounts, each type of account has its own advantages and disadvantages:

Traditional IRA

Contributions into this account are made with after-tax income but are generally tax-deductible in the year they are made. Any withdrawals made before age 59 1/2 will be taxed at your income tax rate and subject to a 10% early withdrawal penalty. You won’t be able to add more contributions after age 70 1/2, and you’ll also be required to start taking minimum distributions.

Simple IRA

This account has higher contribution limits than a traditional IRA but can only be opened by a small business owner on behalf of an employee, allowing the employer to match employee contributions. Contributions are made with pre-tax income that’s deducted from payroll, and any withdrawals are subject to the same penalties as a traditional IRA.

Roth IRA

This account is funded with after-tax income and your earnings will grow tax-free, but your income will determine your eligibility for contributions. You can withdraw original contributions tax and penalty-free at any time, but any earnings withdrawn before age 59 1/2 will be subject to both tax and penalties. You can make contributions at any age and there are no requirements to make withdrawals.

401(k)

This employer-sponsored retirement account allows you to contribute up to $19,000 of your pre-tax income, ($25,000 if you’re over the age of 50) per year. Contributions are deducted from your paycheck and may be matched by your employer. Withdrawals before age 59 1/2 are subject to your current income tax rate and a 10% penalty, and once you reach age 70 1/2, you’ll be required to start making withdrawals.

Retirement savings accounts typically award a higher interest rate than regular savings accounts, as their purpose is to help you save for retirement. Once you’ve reached retirement age or meet any of the withdrawal exceptions, you’ll be able to access money without penalties.

Ways to save within a retirement account

Retirement accounts act as a home for your retirement savings, allowing you to place investments and other deposit accounts inside. Once you’ve decided to open a retirement account, you’ll need to think about which products you’ll use to reach your goals:

IRA savings accounts

IRA savings accounts, like the Capital One 360 IRA Savings for example, are just like regular savings accounts but with added tax advantages.

IRA CDs

While you can usually place any normal CD in your IRA, opening an IRA CD may provide better returns in exchange for a longer term length.

Cash management accounts

The WealthFront Cash account and other cash management accounts allow you to manage all of your money in one place and pay interest on your balance.

IRA money market accounts

Unlike savings accounts where your deposits are kept in reserves, your money is placed in low-risk investments like CDs and bonds. In exchange, you’ll usually earn a slightly higher interest rate.

Bonds and bond funds

Bonds are a low- to medium-risk investment that pays a fixed return on your money. You can purchase individual bonds or diversify your investment with a bond fund, which is made up of multiple bonds.

Compare retirement savings accounts

Comparing retirement savings accounts is similar to comparing regular bank accounts. Here are a few factors you should consider:

Competitive interest rate
No fees
Account access
Risk
Contributions

Competitive interest rate

A higher interest rate will help your retirement savings work harder, even more so if the interest is compounded daily. However, even with a high interest rate on your retirement savings account, you’ll likely earn better long-term returns with a retirement plan that is actively investing your balance.

No fees

To ensure that every dollar you deposit helps you save for your retirement, you should look for a retirement savings account that doesn’t charge maintenance fees. Keep an eye out for other service charges like overdraft fees, wire transfers that could eat into your balance.

Account access

Given the popularity of online banking, your bank should allow you to access your retirement savings account online or via a mobile banking app. Some institutions offer online tools that allow users to track spending, create budgets and manage their money on the go, helping you reach your goals sooner.

Risk

Consider how much risk you’re willing to take on when choosing an account. A general savings, money market or certificate of deposit account will be far less volatile than an investment account. However, these lower-risk accounts will generally offer lower returns. Keep in mind that deposit accounts are usually covered by FDIC deposit insurance, whereas investment accounts are not.

Contributions

Each type of retirement savings account is funded differently, so it’s important to think about how you’re going to make contributions. You’ll need to consider whether you’re going to open your account alone or through your employer and if you’re going to fund your account with pre- or post-tax income.

Name Product 1-year APY 18-month APY 2-year APY 3-year APY 5-year APY
0.05%
0.07%
0.1%
0.55%
1%
0.15%
0.2%
0.25%
0.35%
0.07%
2.3%
2.3%
2.35%
2.35%
2.4%
2.25%
2.25%
2.3%
2.35%
2.45%
2.2%
1.8%
1.8%
1.65%
1.6%

Compare up to 4 providers

Name Product 5-year APY 7-year APY 10-year APY
2.9%
3.05%
3.15%
2.85%
2.48%
2.78%
2.78%
2.4%
2.45%
2.35%
2.4%
2.45%
2.5%
2.3%

Compare up to 4 providers

Pros and cons of using a retirement savings account

The pros

  • Effective way to save for retirement. You’ll earn higher returns compared to conventional bank accounts. You can also choose how much and how often you’d like to contribute, allowing you to tailor your strategy to your retirement goals.
  • Tax advantages. Depending on which type of account you open, retirement savings accounts provide tax benefits that can reduce your taxable income or help your account grow tax-deferred.
  • No fees. Most retirement savings accounts do not cost anything to open and there are many options that have easily avoidable monthly fees or none at all.
  • Flexibility. With four main options and a handful of other less common retirement savings accounts, there are multiple ways you can set up your retirement savings plan.

The cons

  • Contribution limits. Each account has contribution limits that could prevent you from saving as much as you’d like.
  • Limited growth. Returns are generally limited to low interest rates, compared to investments and other retirement accounts that may have a higher potential for growth.
  • Restricted access. Unlike standard savings accounts, you can’t make withdrawals whenever you need money. With the exception of Roth IRAs, you’ll be penalized if you need to access your money before your retirement.
  • Taxable upon withdrawal. Even though contributions may be tax-deferred or tax deductible, your withdrawals will likely be subject to income tax unless withdrawn from a Roth IRA.
  • Minimum distributions. Some accounts require you to start making withdrawals once you reach a certain age, even if you’d rather let your money grow in your account.

Tips for using a retirement savings account

Just like any other type of deposit account, there are a few things to watch out for before opening a retirement savings account:

  • Read the terms and conditions

Make sure you go through the terms and conditions or product disclosure document before signing up for any retirement savings account. The summary page should give you a clear indication of any applicable service fees and charges.

  • Understand your options

Each retirement savings account is different from the next. It’s important that you understand tax implications, contributions, withdrawal penalties and other factors before deciding which account is right for you.

  • Learn about taxes and penalties

Research each account to find out about tax implications for contributions, withdrawals and required distributions. It’s also important to be aware of any penalties that may apply if you choose to make an early withdrawal or any situations that might be exempt from penalties.

  • Speak with a financial advisor

While these retirement savings accounts are much more straightforward than other investment vehicles, it never hurts to get a second opinion. Consider speaking with a financial advisor to determine which account is right for your financial goals and how you can get started on saving.

Bottom line

Retirement savings accounts are a steady way to save for retirement and they don’t require investment knowledge or an expensive portfolio manager. These types of accounts offer tax incentives and the potential for higher interest rates, but you’ll pay a hefty penalty if you need to access your money before retirement. Compare your retirement options to find the best account for your situation or explore other retirement plans to start saving for the future.

Frequently asked questions

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