Roth IRA vs. Savings Account: What's the Difference?

It's more than a different way to save

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Roth IRAs and savings accounts are two financial tools you can use to save money. While a savings account holds cash deposits for emergencies and short-term goals, a Roth individual retirement account (IRA) is a tax-advantaged account to help you save for retirement.

What’s the Difference Between a Roth IRA and Savings Account?

  Roth IRA  Savings Account
Purpose To save for retirement To save for emergencies and short-term goals such as a new car or vacation
Contribution limits Must stay under annual contribution limits No limitations other than $250,000 federal insurance limit
Investment options Can be invested in stocks, bonds, real estate, or other choices Can’t be invested; available at any time as cash
Returns More volatility, not insured, but higher returns over time Federally insured principal, but low returns
Taxes Must make contributions with already-taxed dollars, but can withdraw them tax-free Must pay taxes on any interest you earn


A Roth IRA is an individual retirement account to build your future nest egg using investments. You can take out whatever you’ve contributed to the Roth IRA, but you may pay taxes and a penalty if a withdrawal doesn’t meet specific requirements.

A savings account offers easily accessible safekeeping for your rainy-day funds, and deposits are federally insured at most banks or credit unions. You can also stash money for any short-term financial goal, such as a down payment for a house, new furniture, or a home improvement project.


You can open a Roth IRA through your employer (if offered), or by yourself at an online or brick-and-mortar brokerage firm, bank, or investment company. Savings accounts are available through banks, credit unions, and online lenders.

Contribution Limits

Each year, the IRS sets certain contribution limits for Roth IRAs. For example, for tax year 2022, you can contribute up to $6,000, or $7,000 if you’re 50 or older and closer to retirement. There are also contribution limits based on your modified adjusted gross income (MAGI). This could lead to a reduced contribution, or not being allowed to make a contribution.

On the other hand, most savings accounts don’t come with contribution limits, meaning you can contribute as much or as little as you’d like. Each account holder at federally insured banks or credit unions receives $250,000 in deposit insurance. If the bank fails, you’ll be able to retrieve your savings. However, if you saved an amount over $250,000 at one bank, that amount is not insured.

Investment Options

Roth IRAs are flexible in that you can invest funds in various vehicles. You may choose stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Savings accounts don’t have the option to invest any money you deposit, but do pay interest, which can increase over time.


Savings accounts are seemingly risk-free, but they actually do carry risks—inflation can eat away at the spending power of each dollar saved, over time.


Any investment can fluctuate, and different investments may have widely varying risks and returns. For example, a Roth IRA with more bonds may be less risky than a Roth IRA holding 100% stocks. But since Roth IRAs are geared toward retirement, the benefit of time can leave you with a better chance of higher returns over the course of decades, even if you choose riskier investments.

While interest rates for savings accounts vary, expect low returns over the long term compared to many other investments, in exchange for the relative safety of your funds. If you’d like to earn more with a savings account, compare high-yield savings accounts.


A Roth IRA requires you to make contributions with your after-tax dollars. You can take distributions of your money tax-free in retirement, although you may pay taxes or penalties if you take the distributions outside of qualifying circumstances. When it comes to your savings account, you will need to pay taxes every year on interest you earn of $10 or more and report it on your annual tax return.

Reap the Benefits of a Roth IRA and Savings Account

Roth IRAs and savings accounts are two powerful yet different financial products. Since a Roth IRA is a great option for retirement savings and a federally insured savings account is ideal for short-term goals and emergencies, consider both.

As long as you have income, you can contribute to a Roth IRA, even if you’re in college or in your 20s or 30s. Even if you’re young and retirement seems like a lifetime away, opening a Roth IRA can help you take advantage of the power of compound interest and build a sizable nest egg. Meanwhile, your savings account can ensure a surprise or emergency doesn’t impact your financial stability now.

The Bottom Line

A Roth IRA is a retirement account you make contributions to with your after-tax dollars, can withdraw contributions from tax-free at any time, and get qualified distributions in certain situations. A savings account is a place to store cash you may use for emergency expenses or short-term financial goals. By pairing a Roth IRA with a savings account, you set yourself up for financial success, now and in the future.

Frequently Asked Questions (FAQs)

Is a Roth IRA or a savings account better?

Since a Roth IRA is intended for retirement savings and a savings account is a federally insured (up to $250,000) account for emergencies and short-term financial goals, one is not better than the other. A Roth IRA and savings account serve different purposes and both can benefit you.

Should I use my Roth IRA as a savings account?

It’s a good idea to use a Roth IRA as a retirement savings account, as any investments can be volatile over time. You could even lose the amount you’ve contributed. However, if you need can’t-lose cash for a car repair, vacation, or any other related short-term expense, you’d be better off with a traditional savings account.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "IRA FAQs."

  2. Consumer Financial Protection Bureau. "Is There a Limit on How Much I Can Deposit Into My Savings Account?

  3. NCUA. "Deposits Are Safe in Federally Insured Credit Unions."

  4. IRS. "Topic No. 403 Interest Received."

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