Savings Account vs. Roth IRA: An Overview

A savings account is an interest-bearing account used to store money. Some of the most popular include IRAs and regular (non-retirement) savings accounts. A Roth IRA is a savings account in which earnings accrue on a tax-deferred basis and are tax-free for qualified distributions. In a regular savings account, earnings are added to an individual's taxable income for the year earned.

Check out Tax Treatment of Roth IRA Distributions for an analysis of Roth IRA distributions and examples and explanations of the circumstances under which earnings in a Roth IRA would (or would not) be subject to income taxes.

Key Takeaways

  • A savings account is a broad term that describes different types of interest-bearing accounts that store money.
  • A Roth IRA is a special type of savings account that allows money to accumulate tax-deferred and be distributed tax-free when certain requirements are met.
  • It's important to refer to a non-regular savings account by its designated name (e.g., Roth IRA or CD) as features, rules, and guidelines vary.

Savings Account

When you think of a savings account, you typically envision a regular savings account earning a nominal interest rate at a bank or credit union. However, savings accounts include many different types of interest-bearing accounts beyond a regular savings account. There are savings deposit accounts, certificates of deposit (CD), IRAs, and college savings plans (529), to name a few. Each type of savings account has specialized rules and guidelines but share a common goal of storing money and earning interest.

Roth IRA

A Roth IRA, established by the Taxpayer Relief Act of 1997, is a special type of IRA savings account. Just like a traditional IRA, earnings accumulate on a tax-deferred basis and participants are subject to specific rules, such as annual contribution limits. Unlike the traditional IRA, Roth participants are unable to deduct their contributions on their tax returns. Also, if certain requirements are met (e.g., after 5 years and at age 59 1/2 or older), qualified distributions are tax-free, and contributions can continue beyond the traditional RMD age of 70 1/2. Roth IRAs are not limited to the interest-bearing potential of most regular savings accounts. They can have investment components containing other types of savings accounts. For example, some Roth IRAs invest in CDs. When a savings account differs from a regular savings account, it is important to refer to its classification (e.g., Roth IRA) as rules, features, and guidelines differ significantly across types.

Advisor Insight

Rebecca Dawson
Silber Bennett Financial, Los Angeles, CA

A savings account is a deposit account held at a retail bank that pays interest. The money in a savings account typically does not have check writing privileges, like a checking account. Savings accounts allow you to set aside a portion of your liquid assets (cash) while earning interest.

A Roth IRA is a type of IRA in which you pay taxes on money going into your account but future withdrawals are tax-free if certain requirements are met. The IRS sets annual contribution limits for Roth and traditional IRAs. A Roth IRA's main advantage is its tax structure.

You can contribute to a Roth at any age as long as you have income. A Roth IRA can be invested in, but not limited to, stocks, bonds, mutual funds, unit investment trusts, exchange-traded funds, and real estate limited partnerships.