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Roth IRA vs. savings account: How do they compare?
Key differences in purpose, tax advantages and investment options.
Roth individual retirement accounts (IRAs) and savings accounts are two account options for individuals looking to save and grow their money.
However, these two accounts vary greatly in terms of tax advantages, available asset types and, most importantly, purpose. Find out more about how these accounts differ to see which is right for you.
Roth IRA vs. savings account: A quick comparison
| Roth IRA | Savings account | |
|---|---|---|
| Where to open | Brokers, banks or other financial institutions | Banks, credit unions and other financial institutions |
| Investment options | All assets are permitted inside an IRA except collectibles and life insurance The IRA custodian determines available investment options | Cash deposits |
| Income limits | Individuals filing as single and head of household. Contribute up to $7,000 if your 2024 modified adjusted gross income (MAGI) is under $146,000; individuals with a MAGI above $146,000 can contribute a reduced amount until contributions are phased out upon reaching a MAGI of $161,000 Married couples filing jointly. | None |
| Contribution limits | $7,000 for those under age 50 $8,000 for those age 50 and over | None |
| Eligibility requirements | No age requirements, but you need earned income to contribute Income limits apply | None |
| Who can contribute | Anyone with earned income so long as their income doesn’t exceed a certain threshold | N/A |
| Tax advantages | Earnings grow tax-free Qualified withdrawals are tax-free | None |
| Withdrawal restrictions | Withdrawals of earnings before age 59.5 from a Roth IRA you’ve held less than five years will incur taxes and penalties (exceptions apply) Withdrawals of earnings after age 59.5 from a Roth IRA you’ve had more than five years will be subject to taxes but not penalties | The Federal Reserve suspended the six-transaction rule in Regulation D in 2020, though individual banks may impose withdrawal limits |
| Required minimum distributions (RMDs) | No RMDs | None |
| FDIC insurance | Roth IRAs that contain bank deposits such as certificates of deposit (CDs), savings accounts or money market accounts are insured up to $250,000 | Deposits are automatically insured to at least $250,000 per depositor, per insured bank |
| SIPC insurance | SIPC insures cash and securities up to $500,000 at SIPC-member brokers | None |
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| Learn more about Roth IRAs | Learn more about savings accounts |
Roth IRA vs. savings account: Which one’s better?
Roth IRAs and savings accounts have different purposes, so one is not necessarily better than the other. A Roth IRA is a tax-advantaged retirement account meant for long-term investing, while a savings account is a deposit account for cash.
When to consider a Roth IRA
A Roth IRA may be a good option if you:
- Want to invest your money instead of saving it. Depending on the IRA custodian, invest in anything from stocks and bonds to exchange-traded funds (ETFs), mutual funds and alternative assets like cryptocurrency.
- Want to save for retirement and enjoy tax benefits. Because you contribute after-tax money, qualified distributions are tax-free.
- Don’t want RMDs. Unlike traditional IRAs and 401(k)s, Roth IRAs have no RMDs. Mandatory withdrawals are only required after the death of the account owner.
- Want access to your contributions. Withdraw your Roth IRA contributions at any time tax- and penalty-free.
When to consider a savings account
Consider a savings account if you:
- Want immediate access to your money. Access your money at any time by online transfer, ATM withdrawal or visiting your local bank branch.
- Want to earn interest on your cash. While traditional savings accounts earn next to nill when it comes to interest — 0.47% APY as of February 8, 2024 — many high-yield savings accounts currently pay APYs over 5%.(1)
- Have short- or long-term term savings goals. Savings accounts are ideal for putting aside money for unexpected expenses and emergencies.
The similarities between a Roth IRA and a savings account
Roth IRAs and savings accounts can both be used to save money for long-term goals, and both can earn interest. However, the structure of these accounts will change the way you use them to reach your goals. For example, Roth IRAs offer tax advantages for saving for retirement. Savings accounts do not.
Roth IRA vs. savings account: Where to open these accounts
Open a Roth IRA through banks, financial institutions or brokers like Fidelity and Charles Schwab or with stock trading apps like SoFi Invest and Robinhood.
Open a savings account at banks, credit unions and online financial services companies.
Alternatives to Roth IRAs and savings accounts
While Roth IRAs and savings accounts are great options to help you save for financial goals, other accounts may be more appropriate depending on those goals:
- Traditional IRA. Consider this type of IRA if you want to save for retirement and benefit from a tax deduction in the year in which you make your contributions. Since you pay taxes on your money when you begin taking withdrawals, a traditional IRA may be a good option if you think you’ll be in a lower tax bracket at retirement. The best IRA accounts offer flexible investment options, low fees and research tools and educational resources to help you invest.
- Health savings account (HSA). If you’re enrolled in a high-deductible health plan, set aside money on a pre-tax basis to use for qualified medical expenses. Your contributions reduce your taxable income, and at age 65, you can take penalty-free distributions from the HSA for any reason. However, you still need to use your money for medical expenses to avoid taxes.
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Frequently asked questions
Is it better to put money in a savings account or a Roth IRA?
Your goals will determine whether it’s better to put money in a savings account or a Roth IRA. If you want to save specifically for retirement, a Roth IRA may be the better option because it offers tax benefits. If you’re saving for short- or long-term goals — other than retirement — where you need easy access to your funds, a savings account may be the better option.
What are the disadvantages of a Roth IRA account?
Some disadvantages of a Roth IRA include no tax deductions on contributions and penalties for early withdrawals.
How much will a Roth IRA grow in 20 years?
The amount a Roth IRA grows over 20 years depends on your investment choices and market conditions.
What are three advantages of putting money in a Roth IRA account?
Three advantages of putting money in a Roth IRA include tax-free withdrawals in retirement, tax- and penalty-free withdrawals on contributions at any time and the ability to invest in a range of asset types.
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