The Difference Between a Savings Account & a Roth IRA
A savings account and Roth IRA are vehicles used to store money for a period of time. A savings account is a deposit account held at a financial institution that accumulates interest. Banks, credit unions and money market fund companies all offer savings accounts. A Roth IRA is an individual retirement account that allows your money to grow tax-free if all requirements are met. A Roth IRA is designed for long-term investing. You can open a Roth IRA with your bank or with an investment broker.
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Advantages of a Savings Account
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A savings account allows you to keep your money liquid, meaning that it is easily converted into cash. If for some reason you need cash, you can go to your bank or financial institution and withdraw the money needed from your savings account. You do not need a lot of cash to open a savings account. Some financial institutions allow you to open an account with a minimum $25 deposit. Money placed in your savings account is FDIC-insured up to $250,000. If the bank becomes insolvent, you do not lose your money in the process. With research, you may find some savings accounts that offer high yields, which are more suitable for long-term investing. Most high-yield savings accounts are offered online, allowing for lower overhead costs.
Disadvantages of a Savings Account
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Savings accounts typically offer low interest rates, meaning they are mostly suitable for short-term investments. High-yield savings accounts are typically available through lesser-known financial institutions that offer little to no customer service. Most savings accounts require customers to maintain a minimum balance or incur monthly service fees. Most savings accounts do not offer check-writing abilities and limit the amount of times customers can transfer or withdraw money.
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Advantages of a Roth IRA
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The main advantage of a Roth IRA is the ability to accumulate savings and withdraw from it during retirement without paying taxes. A Roth IRA does not have minimum distribution rules, which means you are not required to start deducting money at age 70 1/2, and your earnings continue to grow tax-free. Generally you cannot withdraw money from a Roth IRA before that age, though there are certain exceptions, including distributions made after the death or disability of the Roth IRA owner. You may also withdraw money without penalty if it is used to pay for medical expenses that are not reimbursed. You may use distributions to pay for a first-time home, educational expenses, and taxes owed to the IRS.
Disadvantages of a Roth IRA
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The main disadvantage of a Roth IRA is that contributions are not tax-deductible, which means you are taxed on the money you contribute to your retirement account. Additionally, unqualified distributions are heavily penalized. As of 2011, the yearly contributions you make to your Roth IRA are capped at $5,000 per person, $10,000 per couple, and $6,000 for individuals over age 50. This limits the amount of money you can save for retirement. Some Roth IRA accounts are not FDIC-insured, and the ones that are earn lower interest rates. You must meet eligibility guidelines to open a Roth IRA. As of 2011, the maximum annual gross income is $107,000 for single filers and $169,000 for married couples filing jointly.
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