A savings account is an interest-bearing account that holds liquid assets you may need in the future. Savings accounts are a good place to keep your emergency fund or money you're assembling for short-term goals like a summer vacation or your next car. The interest earned by a savings account is considered part of an individual's taxable income.

An individual retirement account (IRA) is a tax-advantaged account used to help save money for retirement. There are several types of IRAs; in a Roth IRA, contributions are not tax-deductible, but the money grows tax-free and withdrawals are generally not taxed as long as the account holder is age 59½ at the time of withdrawal.

Tax treatments of Roth IRA distributions vary; under certain circumstances, earnings in a Roth IRA could be subject to income taxes.

Key Takeaways

  • A savings account is an interest-bearing account that gives you easy access to your funds for emergencies or short-term goals.
  • In addition to basic savings accounts, there are specialized types for different purposes (for example, saving for college).
  • A Roth IRA is a special type of retirement account that can also be a good source of emergency cash.

Savings Account

A basic savings account at a bank or credit union is simply a place to keep funds (like those for an emergency fund) and earn a nominal interest rate. In addition to regular savings accounts, there are high-yield savings accounts that pay higher interest but may require minimum deposits.

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

Some online banks offer high-yield savings accounts, with interest rates that are 20 to 25 times higher than traditional savings accounts.

Roth IRA

A Roth IRA is a special type of IRA 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. However, Roth IRA owners are not subject to required minimum distributions (RMDs) at age 72 as owners of traditional IRAs or 401(k) plans are.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which aims to provide financial relief for people amid the COVID-19 pandemic, RMDs are waived in all retirement accounts for 2020.

Unlike a savings account, money deposited into a Roth IRA doesn't have to stay in cash; it can be invested in a variety of vehicles such as stocks, mutual funds, and exchange-traded funds. If you set up a self-directed IRA, you can even invest in real estate.

What Roths and Savings Accounts Have in Common

A savings account is all about having accessible cash. And a Roth offers the most accessibility to your savings of any of the tax-advantaged retirement accounts.

Unlike a traditional IRA, the money you contribute to a Roth (but not its earnings) is available at any time and for any reason with no penalties at all. This makes it possible to use a Roth as an emergency fund—and it means that these retirement accounts are especially helpful for individuals who are worried about locking away money they might need where they can't access it without heavy penalties.

Traditional IRAs and 401(k)s have much stiffer rules and penalties if you need the money you saved there.

One good plan is to put, say, three to six months of emergency savings in a savings account, knowing that you could get more in your Roth if you need it. The catch: You can't re-deposit Roth money you removed should you want to replenish your savings. The other catch: You can only accumulate it at a rate of $6,000 per year ($7,000 if you're 50 or older).

Have a Savings Plan

Use different ways to save money for different purposes. Everyone should have some ready cash in a savings account—you never know what life will hit you with and that cash is yours and won't cost you interest, the way purchases made with credit cards do. Use your IRA accounts for retirement savings; the Roth is a good way to go if you qualify for one.

Other accounts, such as 529 plans, help with saving for education. Each type of savings account has specialized rules and guidelines but share a common goal of storing money and earning interest.

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 is not limited to) stocks, bonds, mutual funds, unit investment trusts, exchange traded funds, and real estate limited partnerships.