Savings Account vs. Roth IRA: Knowing the Difference

Figure out whether a savings account or Roth IRA is right for you

A savings account is a bank or credit union account that holds cash deposits, often temporarily, while a Roth IRA is a tax-advantaged individual retirement account (IRA) meant primarily for long-term retirement investing. Both savings accounts and Roth IRAs can be a source of money in an emergency. Here are the differences between the two.

Key Takeaways

  • A savings account is an interest-bearing account that gives you easy access to your money for emergencies or short-term goals.
  • In addition to basic savings accounts, there are high-yield savings accounts that pay higher interest.
  • A Roth IRA is a special type of retirement account that can also be a good source of emergency cash.
Savings Account vs. Roth IRA

Investopedia / Hilary Allison

Savings Accounts

Savings accounts are a good place to keep ready cash, such as your emergency fund or money you’re amassing for short-term goals, like a summer vacation or your next car. They can also be a safe place to park money temporarily—such as the proceeds from a home sale—before you invest it elsewhere. The nominal interest you earn on a savings account is considered part of your taxable income.

In addition to regular savings accounts, there are high-yield savings accounts that pay higher interest rates but may require larger minimum deposits. These accounts are commonly offered by online banks. Savings accounts of either kind are generally insured up to certain limits by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on the institution at which they are held.

Given a long enough time frame, there are other choices. For example, a certificate of deposit (CD) is less liquid than a savings account, but it will earn you a higher interest rate.

Roth IRAs

IRAs are intended for retirement and come in several varieties. Contributions to a Roth IRA are made with after-tax dollars, and you can withdraw your contributions at any time tax-free. The account’s earnings can also be withdrawn tax-free if you have had a Roth account for at least five years and are age 59½ or older at the time of the withdrawal. There are also some exceptions to the age 59½ requirement.

As with a traditional IRA, Roth IRA earnings accumulate on a tax-deferred basis, and participants are subject to annual contribution limits and other rules. However, unlike owners of traditional IRAs or 401(k) plans, Roth IRA owners don’t have to take required minimum distributions (RMDs); instead, they can leave their money in the Roth IRA for as long as they live and leave it to a designated beneficiary.

Unlike a savings account, money deposited into a Roth IRA can be invested in a variety of vehicles. Most financial institutions limit those choices to stocks, mutual funds, bonds, and CDs. However, if you set up a self-directed IRA, you can have a wider selection, including real estate, cryptocurrencies, promissory notes, tax lien certificates, and private placement securities. You are not permitted to invest an IRA in life insurance or collectibles.

What Roth IRAs and Savings Accounts Have in Common

A savings account is all about having accessible cash, and a Roth IRA offers the most accessibility to your savings of any of the tax-advantaged retirement accounts. Because the money you contribute to it is available at any time and for any reason with no penalties, it can be used as an emergency fund. With traditional IRAs and 401(k) accounts, you’ll pay income taxes and possibly an additional 10% early withdrawal penalty to access even your contributions.

Typically, having emergency savings totaling three to six months of income is a good idea in case you ever need money in a hurry. A Roth IRA can be useful for this purpose, as you can withdraw your contributions at any time. However, there are two catches:

  • No redeposit-you generally can’t redeposit the Roth money you removed should you want to replenish your retirement savings. (There is an exception: You can take a short-term loan from your IRA if you redeposit it within 60 days, a process called an IRA rollover. This can be done only once a year.)
  • Annual contribution limits-in 2022, these are $6,000 a year to a Roth IRA if you’re under age 50 ($7,000 if you’re 50 or over).

Is a Savings Account Good for Saving for Retirement?

No. Retirement accounts are set up specifically to help people reach their goals of having enough money in their post-work years. Savings accounts are far simpler and meant for short-term and emergency needs. Retirement accounts are a way to grow your money, while savings accounts are a way to preserve it.

What Are the Advantages of a Roth IRA?

Probably the biggest advantage of a Roth IRA is that, if you follow the rules, you won’t pay taxes on distributions in retirement. Like a traditional IRA, earnings accumulate on a tax-deferred basis. Roth owners aren’t subject to RMDs at age 72 as owners of traditional IRAs or 401(k) accounts are. Roth funds can be invested in a variety of vehicles, such as stocks, mutual funds, bonds, and CDs. If you set up a self-directed IRA, you can even invest in real estate and cryptocurrencies.

Are Roth IRAs Insured?

Yes. Roth IRAs are insured for up to $250,000 by the FDIC and NCUA. However, that insurance is for the total amount of money in all of the IRAs held by the same person. If you have multiple IRAs, they are not insured individually for $250,000 apiece.

The Bottom Line

Both savings accounts and Roth IRAs have their purposes. Savings accounts can be a good, safe place to keep cash for emergencies and short-term goals. Roth IRAs are for long-term goals, primarily retirement. Because your Roth contributions are always accessible, however, Roth IRAs can also be used for withdrawals in an emergency.

Advisor Insight

Rebecca Dawson
President, Dawson Capital, Los Angeles


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 on 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 IRA at any age as long as you have income. A Roth IRA can be invested in (but is not limited to) stocks, bonds, mutual funds, unit investment trusts, ETFs, and real estate limited partnerships.

Article Sources
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