Getting an early start on saving for retirement is key to establishing a strong financial foundation by the time you plan to retire. There are various ways you can start your savings journey, from investing funds in stocks to putting money in specialized or traditional savings accounts.
One of the top choices among accounts that help you save specifically for retirement is a Roth Individual Retirement Account (IRA). But do the benefits it offers make it worth the investment, or should you create a retirement fund using a regular savings account?
In this guide, we’ll provide a thorough comparison of a Roth IRA vs. savings account by exploring their similarities and differences. We’ll also compare Roth IRAs to traditional IRAs and high-yield savings accounts and provide some alternatives to help you make the best choice for your needs.
Savings Account vs. Roth IRA—How Do They Work?
Both a savings account and a Roth IRA can help you save money for retirement, but certain features may make one type of account a better option than the other. To determine which account includes more benefits for creating a retirement fund, we’ll first answer two essential questions:
- What is a savings account?
- What is a Roth IRA?
What Is a Savings Account?
Savings accounts are deposit accounts you can open at traditional and online banks or credit unions. They’re usually insured up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on your financial institution.
These accounts typically pay interest on the funds you deposit, and the interest rate depends on the type of savings account you open. For example, high-yield savings accounts (HYSAs) pay significantly higher rates than traditional accounts. Either way, whatever interest you earn through a savings account is considered taxable income.
However, the interest earned through savings accounts is lower than the interest you can earn by investing money in stocks or mutual funds. This is why savings accounts are the better choice if you want to save funds for short-term goals, such as:
- New car
- Vacation
- Home renovation
Some traditional savings accounts require you to pay maintenance fees and maintain a minimum account balance to avoid penalties. This also applies to HYSAs, but they usually include lower fees since they’re mostly offered by online banks.
Here are some common benefits and drawbacks of opening a savings account:
| Pros of a Savings Account | Cons of a Savings Account |
| FDIC or NCUA insurance 24/7 money access No contribution limits Low or no minimum deposit requirements | Low interest rates compared to investment options like stocks Variable interest rates Withdrawals typically limited to six per month |
What Is a Roth IRA?
A Roth IRA is a savings account designed to help you save money for retirement. You make contributions to this account using after-tax dollars, and you can withdraw them whenever you need to without any penalties. However, besides several exceptions, you can only withdraw the earnings free of tax if you’ve funded the account for at least five years and are 59½ or older.
Other retirement accounts like traditional IRAs and 401(k) plans may come with special terms, such as:
- 10% penalty for early withdrawals
- Required minimum distribution (RMD), which represents the minimum amount you must withdraw each year
Roth IRAs have neither of these requirements, and they even allow you to leave your Roth IRA to a beneficiary. Unlike regular savings accounts, they also allow you to invest money in various vehicles like stocks, mutual funds, or certificates of deposit (CDs) and earn more interest on your deposits.
However, Roth IRAs include yearly contribution limits. For example, in 2023, the contribution limit was $6,500 per year if you’re younger than 50 and $7,500 if you’re 50 or older. In 2024, this limit increased to $7,000 for those under 50 or $8,000 for contributors over 50.
Here are the main advantages and disadvantages of keeping your funds in a Roth IRA:
| Pros of a Roth IRA | Cons of a Roth IRA |
| Earnings grow tax-free Contributions can be withdrawn free of tax and penalties No RMDs No income tax on inherited Roth IRAs No age limits | No additional tax breaks Contributions are taxed Earning withdrawal limits Low maximum annual contributions |
Roth IRA vs. Savings Account—Main Differences
Both of these accounts allow you to access funds whenever you need them without paying fees, which makes them a great option for establishing an emergency fund. However, they also come with several differences. Take a look at these in the table below:
| Feature | Roth IRA | Savings Account |
| Interest rates | Higher interest rates since you can invest in multiple assets. For example, the average stock market return is around 10% per year | Lower interest rates—the average annual percentage yield (APY) is 0.45% |
| Withdrawal limits | No monthly withdrawal limits, but only contributions can be withdrawn tax-free. Earnings withdrawn before the age of 59½ are taxed and subject to a 10% penalty | Withdrawals are sometimes limited to six per month |
| Contribution limits | Contributions are limited to $7,000 (or $8,000 if you’re older than 50) in 2024 | No contribution limits |
| Income limits | The 2024 maximum modified adjusted gross income (MAGI) is $146,000–$161,000 for single tax filers | No income limits |
| Insurance | Only insured by the FDIC or NCUA if you invest funds in CDs or similar savings accounts | Insured up to $250,000 by either the FDIC or NCUA |
High-Yield Savings Account vs. Roth IRA
High-yield savings accounts work like regular savings accounts—you deposit funds and earn interest on your contributions. However, the APY these accounts offer can be as high as 4–5% or more, which is significantly higher than a regular account APY. Plus, HYSAs include lower maintenance fees because they’re usually held at online banks, which generally pay low overhead fees.
But which is better if you’re saving for retirement—a high-yield savings account or a Roth IRA? Here are a few factors to consider:
- Growth potential
- Risk levels
- Withdrawal and contribution limits
Growth Potential
While HYSAs offer greater APYs than regular savings accounts, their interest rates are variable. This means they rise and fall as the market conditions change, and they can be impacted by inflation.
Meanwhile, a Roth IRA lets you invest funds in a diversified portfolio of assets (like stocks and bonds) and can outpace inflation and help with long-term money growth. This is one of the main pros of having a Roth IRA as your retirement savings fund.
Risk Levels
HYSAs are low-risk investments because they’re typically FDIC-insured. Still, if your account balance is higher than the insured amount and your bank fails, you’ll only get reimbursed for the insured amount and may lose some money.
Roth IRAs involve higher risk because they let you invest in assets like stocks. If your investment loses value, you can lose money. However, if your asset’s value increases, you can earn significantly more than you would with a HYSA.
Withdrawal and Contribution Limits
HYSAs are more flexible than Roth IRAs because they don’t have strict withdrawal and contribution requirements. You can typically deposit and take out money from a HYSA at any time with no penalties, although some accounts include monthly withdrawal limits. Roth IRAs, however, have more stringent limits, and may require you to pay fees if you exceed them.
Traditional IRA vs. Savings Account—How Do They Compare?
As opposed to Roth IRAs, traditional IRAs allow you to make contributions with pre-tax dollars, meaning your funds grow tax-free until you retire. However, once you withdraw the funds, you have to pay taxes on them, and your tax rate is based on your income level at the time of the withdrawal.
Traditional and Roth IRAs have the same annual contribution limits. Like with Roth IRAs, you can start withdrawing funds from these accounts when you’re 59½ or older. Still, traditional IRAs come with some limitations:
- You must start making withdrawals by the age of 73
- Early withdrawals are considered taxable income, and you may have to pay a 10% penalty on those funds
One advantage of traditional IRAs, however, is that your contributions to the account may be deducted from your federal income tax return, which can help you save money by reducing taxes.
Alternatives to Roth IRAs
If a Roth IRA doesn’t fit your needs, there are a few alternative options you can explore to save for retirement. For example, you can:
- Participate in a 401(k) plan—This is a retirement savings plan sponsored by your employer. It allows you to contribute a percentage of your income to a retirement account, and it lets your employer make contributions as well
- Open a health savings account (HSA)—While HSAs are primarily designed to help you cover healthcare expenses, you can also use them to save for retirement because HSA contributions are tax-deductible. The withdrawals are also tax-free if you use the funds for health-related reasons
- Try a savings account with credit building features—This account is the best option if you’re looking for a savings account that can help you save funds for retirement and maintain a good credit score
- Start a high-yield savings account with fraud protection—Storing your life savings in this kind of account will grow your funds while protecting them from resourceful scammers
The only savings account that offers these benefits is FortKnox. This innovative banking platform allows you to save and grow funds while shielding them from scamming attempts that have become frequent.
