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, their similarities and differences, and the pros and cons of each option.
Key Points
• Roth IRAs are designed for retirement savings, offering tax-free growth and tax-free withdrawals in retirement.
• Savings accounts are ideal for short-term goals and emergency funds, offering more accessibility and flexibility.
• Roth IRAs can potentially yield higher returns through investments, while savings accounts provide safety and liquidity.
• Both account types can be opened with low initial deposits and are insured if held at banks.
• Choosing between them depends on financial goals, with Roth IRAs generally being better for long-term growth.
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 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-yield savings. The main benefits of high-yield savings accounts include above-average interest rates and low or no monthly fees. For example, online banks may offer high-yield savings accounts with rates that are many times higher than the national average savings rate, with no monthly fee.
• Money market savings. Money market savings accounts, or money market accounts, combine features of both savings accounts and checking accounts. 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 for health care expenses.
You could also add certificates of deposit (CDs) to this list, though a CD works differently than a savings account. CDs are time deposit accounts, 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.
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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 and may not outpace inflation. |
| 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 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 insured limit. |
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What Is a Roth IRA?
A Roth IRA is a type of individual retirement account that works somewhat differently than 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.
The way a Roth IRA works is that you set aside money using after-tax dollars, up to the annual contribution limit. That means you can’t deduct contributions to a Roth IRA. However, you won’t pay taxes on account earnings and will be able to withdraw funds tax-free in retirement.
You can leave money in your Roth IRA until you need it, which may allow 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 2024 and 2025 is $7,000, or $8,000 for those 50 and up. You can make a full contribution if your tax status is:
• Married filing jointly or a qualified widow(er) with a modified adjusted gross income of up to $230,000 in 2024 (up to $236,000 in 2025)
• 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 up to $146,000 in 2024 (up to $150,000 in 2025)
Contributions are reduced once you exceed these income thresholds. They eventually phase out completely for higher earners.
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. |
| Earnings grow tax-free and you can withdraw original contributions at any time, without a penalty. | You can’t withdraw earnings tax-free until age 59 ½ and the account is at least 5 years old. |
| 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 or both 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 IRAs vs. savings accounts, however, Roth accounts have an edge for retirement planning. Whether it makes sense to choose something like a high-yield savings account vs. a Roth IRA can depend on what you want to set money aside for.
Roth IRA vs Savings Account: Key Differences
To understand how savings accounts and Roth IRAs compare, it helps to look at some of the key differences between them.
| 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 grow tax-free and allow for 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 2024 and 2025, the limit is $7,000 ($8,000 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, you can’t withdraw earnings without paying a penalty before age 59 ½ (though there are some exceptions). Original contributions can be withdrawn at any time without a 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. | Your deposits are protected (up to the insured limit). |
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. a 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 potentially 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 medium-term goal you’re saving for
• Want a safe 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. a 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 have another money goal that is a few months or years away. Your deposits will earn interest and you’ll be able to easily access your funds (penalty-free) when you need them.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
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 need in the next few months or years. A Roth IRA, on the other hand, is better suited for saving for retirement, since it has greater growth potential (though returns are not guaranteed), while also providing tax benefits.
Should I use a Roth IRA as a savings account?
While you could use a Roth IRA as a savings account, you generally can’t access earnings on the account until age 59 ½ without paying a penalty. Another downside of using a Roth IRA as a savings account is that funds are typically invested for long-term growth. If you withdraw money in the short-term, you could lose money due to fluctuations in the value of your assets.
What is the downside of a Roth IRA?
One of the main disadvantages to a Roth IRA is that contributions are made with after-tax money, which means you don’t get a tax deduction in the years you contribute. Another drawback is that not everyone can take advantage of a Roth IRA, since there are income limits on contributions.
Also keep in mind that the maximum annual contribution to Roth IRA is relatively low compared with a 401(k). As a result, you will likely need other accounts to adequately save for retirement.
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, meaning the owner, not a plan administrator, directs how the funds are invested. The same FDIC insurance limits that apply to savings accounts apply to these Roth IRAs.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
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