Savings Account vs. Roth IRA: What’s the Difference?

A savings account is a bank or credit union account that holds cash deposits. A Roth IRA is a tax-advantaged individual retirement account (IRA) meant primarily for long-term retirement investing. Both savings accounts and Roth IRAs can be a source of money in an emergency. Here are the differences between the two.

Savings Accounts

Savings accounts are an excellent place to keep ready cash, such as your emergency fund or money you’re amassing for short-term goals, like a summer vacation or your next car. They can also be a safe place to park money temporarily—such as the proceeds from a home sale—before you invest it elsewhere.

In addition to regular savings accounts, high-yield accounts pay higher interest rates but may require larger minimum deposits. These accounts are commonly offered by online banks. Savings accounts of either kind are generally insured up to certain limits by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on the institution at which they are held.

Given a long enough time frame, there are other choices. For example, a certificate of deposit (CD) is less liquid than a savings account, but it will earn you a higher interest rate.

Roth IRAs

IRAs are intended for retirement and come in several varieties. Contributions to a Roth IRA are made with after-tax dollars and can be withdrawn at anytime without penalty. The account’s earnings can also be withdrawn tax-free if you have had a Roth account for at least five years and are 59½ or older at the time of the withdrawal. There are also some exceptions to the age 59½ requirement.

Similar to traditional IRAs, Roth IRA earnings compound and participants are subject to annual contribution limits and other rules. However, unlike owners of traditional IRAs or 401(k) plans, Roth IRA owners don’t have to take required minimum distributions (RMDs); instead, they can leave their money in the Roth IRA for as long as they live and leave it to a designated beneficiary.

Money deposited into a Roth IRA can be invested in various vehicles. Most financial institutions limit those choices to stocks, mutual funds, bonds, and CDs. However, if you set up a self-directed IRA, you can have a wider selection, including real estate, cryptocurrencies, promissory notes, tax lien certificates, and private placement securities.

What Roth IRAs and Savings Accounts Have in Common

A savings account is all about having accessible cash, and a Roth IRA offers the most accessibility to your savings of any of the tax-advantaged retirement accounts. Because the money you contribute to it is available at any time and for any reason with no penalties, it can be used as an emergency fund. With traditional IRAs and 401(k) accounts, you’ll pay income taxes and possibly an additional 10% early withdrawal penalty to access even your contributions.

Typically, having emergency savings totaling three to six months of income is a good idea in case you ever need money in a hurry. A Roth IRA can be useful for this purpose, as you can withdraw your contributions anytime. However, there are two catches:

• No redeposit: you generally can’t redeposit the Roth money you removed should you want to replenish your retirement savings. (There is an exception: You can take a short-term loan from your IRA if you redeposit it within 60 days, a process called an IRA rollover. This can be done only once a year.)
• Annual contribution limits: for 2023, the limit is $6,500 a year to a Roth IRA if you’re under age 50 and $7,500 if you’re 50 or over.

Frequently Asked Questions

The Bottom Line

Both savings accounts and Roth IRAs have their purposes. Savings accounts can be a safe place to keep cash for emergencies and short-term goals. Roth IRAs are for long-term goals, primarily retirement. However, Roth IRAs can also be used for withdrawals in an emergency because your Roth contributions are always accessible after you've had it for five years.