Is a Roth IRA Better Than a Savings Account?
Whether or not a Roth Individual Retirement Account (IRA) is better than a savings account depends on your financial goals. Roth IRAs are designed to help you save for retirement, while savings accounts may be better suited to short-term financial needs.
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Function
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You can use money you contribute to a Roth IRA to purchase financial products like stocks, bonds, CDs and mutual funds. As long as those assets are in the account, their earnings are not subject to taxes. Qualified withdrawals (distributions) from a Roth IRA are tax free.
Features
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You can take qualified distributions from a Roth IRA beginning the year you turn 59 1/2. Distributions you take earlier than that may be subject to a 10 percent penalty. There are exceptions: you can take penalty-free distributions to pay for your first home, or pay for certain higher education expenses.
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Benefits
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Though most brick-and-mortar banks give you around a quarter percent interest on your savings account deposits, this is far less than what you could make if you purchased relatively safe assets, like CDs, with a Roth IRA. Moreover, the interest your savings account earns are subject to taxes; Roth IRA earnings are not.
Considerations
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Though Roth IRAs have many benefits, they are only better than savings accounts if you want to grow wealth for the long term. Savings accounts are liquid assets, meaning that, with very few restrictions, you can access your money any time, for any reason, and not be subject to a tax penalty.
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