App version: 0.1.0

Savings Account vs Roth IRA: Key Differences

Savings Account vs Roth IRA: Key Differences
Lauren Ward
Lauren WardUpdated February 3, 2023
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A savings account and a Roth IRA are two key tools that help you reach your financial goals, both in the short- and long-term. A savings account gives you a convenient and safe place to store your emergency funds and money you’ll need in the near future, while a Roth IRA can help you build wealth over time and fund your retirement.Find out what's required to open each account, the risk levels involved, and other key differences between a Roth IRA and a savings account.

Understanding Savings Accounts

A savings account is a type of bank account designed to hold money you don’t need right away. Your deposits earn interest, typically expressed as an annual percentage yield (APY). While the average savings account's annual yield is relatively low, savings accounts are virtually risk-free. The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insure savings accounts at most banks and credit unions up to $250,000 per account, per institution, should the bank or credit union go out of business.The money in your savings account is also easy to access when you need it — via ATM, at a teller (if the bank has physical branches), or by transferring money to a checking or other type of account. However, these accounts typically have restrictions on how often you can make withdrawals or transfers. While federal rules restricting savings account owners to six withdrawals per month (called Regulation D) have been suspended, banks and credit unions can still cap the number of withdrawals or transfers you’re allowed to make and charge fees if you exceed the max.Recommended: Checking vs. Savings Account Differences

Understanding Roth IRAs

A Roth IRA is a type of tax-advantaged individual retirement account. Unlike a traditional IRA, you make contributions into the account with after-tax income. The money you earn in the account is not taxed, though. And, once you reach age 59 ½, you can withdraw the funds without paying any tax on your contributions or earnings, as long as the account has been open for at least five years.If you withdraw the money before you’re 59 ½ (or earlier than five years after you open the account), you may have to pay taxes on those earnings as well as a 10% early withdrawal penalty. There are some circumstances (such as buying a first home and paying for college expenses) that allow you to withdraw funds from this account without penalties as well.Unlike traditional IRAs, Roth IRAs allow you to withdraw your contributions (the money you deposited) at any time without a penalty. Since this money was already taxed, you don’t pay taxes on these withdrawals.Unlike savings accounts, there are limits to how much you can contribute to a Roth IRA each year. For tax year 2023, you can contribute up to $6,500 ($7,500 if you're age 50 or older) as long as your modified adjusted gross income (MAGI) doesn't exceed these limits:
  • Married and filing jointly: $218,000
  • Single, head of household, or married filing separately: $138,000
Your contribution amounts begin to phase out when you pass the above income thresholds, and you can’t contribute at all if your household income reaches $153,000 as a single filer or $228,000 as a married couple filing jointly.Once you put money into the Roth IRA account, you can invest it in assets like stocks, exchange-traded funds (ETFs), bonds, or mutual funds. While investing involves risk, it has the potential to earn a significantly higher return than a savings account over the long term.Recommended: Savings Account vs Brokerage Account: How They Compare

Benefits of a Savings Account for Retirement

One of the biggest benefits of using a savings account for any type of financial planning is that it's virtually risk-free. Your funds aren't invested, so you don't have the volatility that comes along with the stock market. On the downside, however, that means your long-term growth potential is limited. Even high-yield savings accounts generally don’t pay enough to outpace inflation. As a result, cash sitting in a savings account can lose value and purchasing power over time. Plus, there aren’t any tax benefits with savings accounts. For long-term savings goals, such as your retirement, you’re typically better off with a tax-advantaged investment account, such as a Roth IRA, traditional IRA, or 401(k), than a savings account. Recommended: Average Savings Account Interest

Benefits of a Roth IRA

One of the biggest benefits of a Roth IRA is that your money grows tax-free. And, if  you make a qualified distribution from the account, you’ll never have to pay tax on those earnings. Roth IRAs also allow you to invest in various vehicles that can help you build wealth over time. Though investments come with risk, they also have potential for greater growth compared to a savings account yield.With a Roth IRA, you also have the option to withdraw your contributions at any time without paying a penalty should you need the money for something else, like an emergency expense.Another advantage of a Roth IRA is that, unlike traditional retirement accounts, there are no required minimum distributions (RMDs) that kick in at a specific age. No matter how old you are, you can withdraw funds after age 59 ½ on your own timeline.

Differences Between Roth IRAs and Savings Accounts

There are some significant differences between Roth IRAs and savings accounts. Here’s a closer look.
Roth IRASavings Account
EligibilitySingle tax filers: Income can’t exceed $153,000 Married filing jointly: Income can’t exceed $228,000No income limits
Contribution Limits$6,500 per year ($7,500 for those 50 and older)None
TaxationContributions are not tax-deductible; qualified distributions are tax-free Contributions are not tax-deductible; interest earned is taxable
Risk LevelRisk involvedVirtually none 

Eligibility 

Generally, any adult is eligible to open a savings account as long as they meet the financial institution's minimum deposit requirements. A Roth IRA, on the other hand, has income limits. For tax year 2023, if you’re single and earn more than $153,000, or married and together earn more than $228,000, a Roth IRA isn’t an option.

Contribution Limits

There is no limit to how much you can contribute to a savings account, although each account is only federally insured up to $250,000. Eligible Roth IRA account holders can contribute up to $6,500 per year. Those who are 50 years or older can make an extra catch-up contribution of $1,000 per year. 

Taxation 

With a savings account, your contributions come from taxable income, and any interest added to the account is taxable at the same rate as your income. Your financial institution will send you a 1099-INT form each year so you can accurately report the income on the Internal Revenue Service (IRS).With a Roth IRA, your contributions also come from taxable income. However, you don't have to pay taxes on any growth in the account while the money is in the account. And, you won’t pay tax on that growth when you take the money out as long as it's a qualified distribution.

Risk Level

A savings account comes with virtually no risk. Your funds will earn interest and you can’t lose your money (up to $250,000) if the account is held at a federally insured bank or credit union.With a Roth IRA, on the other hand, the funds are typically invested. Generally, investing involves buying assets, such as stocks or bonds, that you hope will increase in value over time. However, there’s no guarantee that they will. So investing inherently comes with a certain amount of risk, including the risk that the assets could go down in value.

Similarities Between Roth IRAs and Savings Accounts

There are a few similarities between savings accounts and Roth IRAs. For one, both are accounts that allow you to keep money intended for later use separate from your day-to-day spending. Both accounts also allow you to withdraw your deposits (though savings accounts typically restrict you to six withdrawals per month). Unlike other types of IRAs, Roth IRAs let you withdraw your contributions (though not your earnings) at any time without a penalty. Keep in mind, though, that tapping your Roth IRA pre-retirement will reduce the earning potential of the account and take funds away from your retirement. 

How Both Accounts Can Fit Into Your Savings Strategy 

Instead of choosing between a Roth IRA vs. a savings account, consider using both. A savings account can help you work toward short-term financial goals like building an emergency fund, buying a new car, or going on a vacation. However, APYs on savings accounts are generally low. For retirement, which is a long-term savings goal, you’ll want to consider making regular contributions to a retirement investment account, such as a Roth IRA.Even if you already have a 401(k) through your employer, you may be able to open and contribute to a Roth IRA on your own, as long as you’re qualified and follow the IRS’s contribution and income limits. Combining these plans could help you build more wealth for your retirement.Recommended: Average American Savings by Age 

The Takeaway

You don't have to choose between a Roth IRA vs. a savings account. Instead, you may want to use both types of accounts at the same time. Depending on your income, you may be able to make regular contributions to a Roth IRA (up to a certain limit each year) to fund your retirement. For cash you’ll need sooner, say in the next few months or years, consider opening a savings account  that pays a competitive APY and charges no, or minimal, fees.If you’re looking for the best possible return on your savings, Lantern by SoFi can help. With our online banking marketplace, it’s fast and easy to compare high-yield savings accounts based on APY, fees, and balance minimums.  Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

Is a Roth IRA insured?
Can I use my Roth IRA as a savings account?
Is it advisable to put money in a savings account or Roth IRA?
Photo credit: iStock/
LCBK1222017

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
Share this article: