What's the difference between a savings account and a Roth IRA?

Retirement Savings, IRAs
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April 2017
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A savings account is a bank account where the deposits that you make earn interest. Savings accounts are generally used for money you need to keep 'safe' for a relatively short period of time (1 day -3 years or more). Examples of how savings accounts are often used include saving for: emergency funds, educational expenses, vacations, planned holiday spending, down payments for a home or cars. Savings accounts pay interest that is taxable. You will receive a 1099 INT every year to report the interest you earned on your income taxes.

A Roth IRA is generally used as a retirement savings account. Deposits can be invested into stocks, bonds, and other investments as well as be held in money market accounts. Your invested returns are not guaranteed. So, any stock and bond investments you have will carry the risk of loss.

Monies deposited into these accounts should generally be thought of as long-term savings (not needed for 5 years or many more).The money deposited into these accounts has already been taxed. But, the three sweetest things about Roth IRA accounts are that:

  1. The account grows tax free (no 1099 INT or 1099 DIV every year).
  2. When the money is withdrawn from the Roth IRA (subject to a minimum holding period) is tax free. 
  3. When you turn age 70 1/2, you are not required to take money out of your account in the form of a withdrawal known as an RMD -required minimum distribution.

As with anything relating to taxes and the government, there are rules for Roth IRAs. I mean lots of rules. Some of which include: you must have earned income, can only contribute up to a certain income level, there are annual contribution maximums, you have to have an account open for 5 years before taking penalty-free withdrawals that include earnings, and then there's that pesky age 59 1/2 rule.

For more information, Investopedia has an article on Roth IRAs and there is always the IRS web site which gives a brief overview on Roth IRAs and then refers you to its Publications 590-A and 590-B for the nitty-gritty details and rules.

April 2017
April 2017
April 2017
October 2006