Smart people begin investing for retirement while they are still young. This doesn't mean giving up on the fun things in life like going on vacations or buying a new car. It just means you need to pay yourself first to provide for your future. You can do this with IRAs or savings accounts. In some cases, one option may work better, or you may want to diversify your investments with both types of accounts.
You can open both an IRA and a savings account through a financial institution or mutual fund company. Most banks have regulations on the minimum amount required for opening the account. Some financial institutions will allow you to start a savings account for less than $100 and an IRA for around $500. You can contribute as much money as you want to your savings account, but IRAs have a maximum investment amount. In 2010, the maximum contribution was $5,000, according to the U.S. Department of Labor.
Many young couples understand the power of interest rates. The higher the rate, the better the return. But, this isn't always the case. With a savings account, your interest depends on the method the bank uses to compound interest. A lower rate compounded daily may earn more interest than a higher rate compounded weekly, monthly, semi-annually or annually, according to the University of Arizona. For IRAs, the interest can depend on the method the financial institution uses to gain interest. Investments in mutual bonds are often safer, returning a steady income, while stock market investments can be volatile. One method may appear to gain interest faster but have less stability. If the market crashes near your retirement, you could lose the majority of your interest if you didn't diversify your investments.
When it comes to saving money, you want to get the biggest bang for your buck. Your employer may have an IRA program available that will allow you to contribute a portion of your pre-taxed paycheck. This means the government won't deduct taxes on that portion of your money until you get ready to use the IRA, according to IRS Publication 590. The government taxes IRAs based on the type of account. Roth IRAs have different rules than Simple IRAs. With a savings account, the government includes any interest you earn in your annual taxable income. This means you pay taxes every year for your earnings, even if you don't use the money in the savings account.
The Federal Reserve requires banks to disclose hidden fees, but it's easy to miss hidden costs with all the fine print. When you add up the fees, you might find a savings account isn't any better than putting cash in a safe. The interest you earn for your savings account is less than almost any other investment option, including an IRA. Banks may require you to keep a minimum balance in the account, reducing the flexibility you have to tap into the funds. If you fall below the minimum balance, you might have to pay maintenance fees, which can quickly eat away any interest gains. Some banks also charge an annual fee to maintain the account.
- piggy bank image by pershing from Fotolia.com