Both a savings account and a Roth IRA allow you to save for future needs. Savings accounts generally provide short-term or emergency funds, while a Roth IRA is meant for your long-term retirement needs. Most investors can use money from their savings accounts to start a Roth IRA. However, other factors, such as your income, may prohibit you from opening a Roth IRA.
Deductibility of Contributions
Both a savings account and a Roth IRA are "after-tax" vehicles, meaning the money in those accounts has already been taxed. Therefore, you can easily use money in a savings account to start a Roth IRA/ You do not get any type of tax deduction for contributing money to a Roth IRA, as you would by contributing to other tax-advantaged accounts, such as traditional IRAs or 401(k) plans.
All Roth contributions and earnings accumulate tax-free. You neither have to declare Roth earnings on your tax return nor pay taxes on your annual dividends, interest and capital gains. This can amount to a substantial tax benefit. Additionally, when you take money out of your Roth in retirement, all of the money comes out tax-free, unlike with traditional IRAs.
Access to Money
While you can access your savings account at any time without penalty, you can't take out the earnings in your Roth IRA -- that is, the interest that your account has earned -- until the account has been open at least five years and you have reached age 59 1/2. Distributions not meeting these standards are fully taxable and also subject to an additional 10 percent early withdrawal penalty. You can, however, withdraw the contributions to your Roth at any time without penalty.
Savings accounts typically generate very little in the way of investment returns. In a Roth IRA, you can invest in almost any security you could buy in any regular investment account, such as stocks, mutual funds and bonds. Since a Roth is designed for long-term investments, you can typically be a bit more aggressive than with your other investments, because it's likely that the money will be invested long enough to ride out any short-term declines in value.
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