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Roth IRA vs. savings account: What's the difference, and which is better?

Most people know that saving money is important. But where’s the best place to stash your hard-earned cash?

Savings accounts and Roth IRAs are two types of accounts you can use to save money. Savings accounts are highly accessible and best for shorter-term goals, while Roth IRAs offer tax advantages and a higher potential for long-term growth. While they work differently and serve unique purposes, both can be a part of your overall savings strategy.

Learn more about how Roth IRAs and savings accounts compare and how to use both to your advantage.

A savings account is a type of bank account that allows you to deposit your money and earn interest on your balance. Unlike checking accounts, which are best for everyday transactions, savings accounts are best suited for cash you won’t spend in the immediate future.

Keep in mind that while you can generally withdraw your money whenever you want, some savings accounts limit the number of monthly transactions you can make.

Due to their interest-earning potential and relative accessibility, savings accounts are best for short- and medium-term goals, such as an emergency fund, vacation, and major purchases.

There are several types of savings accounts to choose from, including:

Traditional savings accounts: These are savings accounts opened at traditional brick-and-mortar banks or credit unions. They typically offer lower interest rates.
High-yield savings accounts (HYSAs): Commonly available from online banks, HYSAs offer higher interest rates and often have low fees.
Money market account (MMA): These accounts blend savings and checking account features; they often pay higher-than-average interest rates and come with a debit card and/or checks. However, MMAs also typically have higher minimum balance requirements.

You can open a savings account at a traditional brick-and-mortar bank, an online bank, or a credit union. Deposits at these financial institutions are federally insured up to $250,000 in most cases.

A Roth IRA is a type of tax-advantaged investment account available to those with earned income. Though you can use a Roth IRA for a range of purposes, these accounts are commonly used for retirement savings.

Once you open and contribute to a Roth IRA, you can invest the money in stocks, mutual funds, exchange-traded funds (ETFs), bonds, and more. These investments can provide a higher rate of return compared to savings accounts (even high-yield savings accounts), but they also come with more risk.

When you contribute to a Roth IRA, your contributions aren’t tax-deductible. However, your contributions grow tax-free, and you don’t have to pay taxes on qualified distributions. You can open a Roth IRA at a bank, but you’ll likely have more investment options when you open one at a brokerage, such as Vanguard or Fidelity.

Roth IRAs come with an extensive set of rules, especially when it comes to contributions and when and how you can use your earnings.

As of 2025, the annual contribution limit for a Roth IRA is $7,000 ($8,000 for those 50 and older). However, if you make more than $150,000 as a single tax filer or $236,000 as a married couple filing jointly, you might face lower contribution limits (or be unable to contribute at all).

Unlike savings accounts, there may be penalties associated with certain distributions from your Roth IRA. For example, you generally can’t withdraw your earnings before age 59 ½ without penalty unless you use the money for a specific purpose, such as qualified education expenses or the purchase of your first home.

There’s also a rule that five years must pass from the beginning of the year that you open your Roth IRA and when you withdraw any earnings — otherwise, you may have to pay taxes or penalties.

Though Roth IRAs and savings accounts have some common characteristics, there are some key differences between them. Keep the following in mind when comparing savings accounts and Roth IRAs:

Anyone can open a savings account, though minors generally need to open one with an adult co-owner. On the other hand, you must have earned income to open a Roth IRA, and high earners may not be able to contribute the full amount.

If you open a savings account at an insured bank or credit union, your deposits are guaranteed up to $250,000 per depositor, per institution, per ownership category. But it’s not as clear-cut with a Roth IRA. If you open a Roth IRA at a bank, your account is usually insured. But a Roth IRA opened at a brokerage, in which you hold securities like stocks and mutual funds, isn’t.

Savings accounts don’t offer any tax breaks, and you have to pay taxes on your interest income.

Roth IRAs, however, are tax-advantaged accounts. Your money grows tax-free, and you don’t have to pay taxes on qualified distributions.

Savings accounts don’t have contribution limits, but Roth IRAs do. Current annual limits for Roth IRAs are $7,000 ($8,000 for those age 50 and older).

Roth IRAs generally offer much more potential for growth. For context, the best high-yield savings accounts might pay around 4% on your balance, while investing your Roth IRA contributions in a diversified portfolio could earn you between 7% and 10%.

Savings accounts are typically best for short- and medium-term financial goals, like going on vacation or making a down payment on a house. Meanwhile, Roth IRAs are often used for retirement savings.

You can generally access money in your savings account whenever you need it (although some banks may limit monthly transactions). On the other hand, Roth IRAs limit when you can withdraw money and how you can use it.

When it comes to picking between a savings account or Roth IRA, the best choice depends on your goals. In many cases, you may want both.

Anyone can benefit from a savings account. If you’re looking for a place to earn modest interest on money you set aside for short- and medium-term goals, a savings account is the best option. Not only does a savings account provide flexibility, allowing you to withdraw your cash whenever you need it, but your money is also insured.

Many people can benefit from a Roth IRA, though you need to have earned income to open one. If you meet the income limits and want a tax-free pool of money in retirement, a Roth IRA is a great option. While this account doesn’t have the same degree of flexibility as a savings account, its growth potential and tax advantages make it a valuable financial tool, especially for long-term savings goals.

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