Isn't it better to save money in a savings account where it can be easily accessible without that early withdrawal tax penalty?
Stephanie Guerra: An IRA is a retirement savings account, whether it's a ROTH or a traditional IRA. Normally you would have a retirement account at your place of employment, and those are called 401ks. An IRA is the same thing as a 401k, except it is an independent account, and your employer is not connected with that.
Yes, you COULD just save your money in a regular savings account.
You could do both, if you're not sure.
But generally bank accounts make very little money in interest. You would earn more in almost any kind of 401k, which often has contributions from your employer.
Truthfully, the rules aren't that bad in 401ks and IRAs. They only put them there so you won't take the money out so easily. If you have that kind of discipline, and KNOW you will not touch your money in your bank savings, then it's possible you could do that.
what are some of the advantages of a roth ira? the biggest advantage is that the entire account is income tax free. what that means is that when you take money out of a roth, you don't pay income tax on that withdrawal.
let me give you and example:
you deposit $1,000 into a roth. 10 years form now it has grown to $2,000. that entire $2,000 is tax free. this is the only account, today, where that is possible.
in a regular savings account (like in a bank) if you deposit $1,000 and earn 3% interest, then every year you will pay income tax on the $30 you earn as interest.
in a traditional ira your deposit can be withdrawn tax free, but any growth, interest earnings will be taxable at your ordinary income tax level.
there are other things, though. in a traditional ira, you get a tax deduction for your contribution. this means if you deposit (contribute) $1,000 into a traditional ira, you can deduct that contribution from your earned income when you file your taxes.
this is not true for a roth ira. you get no tax deduction for a roth. your tax advantage happens upon withdrawal.
as someone else has said, you should consider both regular savings and tax quaified savings. they are for different times in your life and they solve different problems.
a regular savings is designed to solve more immediate problems like the need for short term emergency cash.
a savings account is just that it could be money you simply put into some account that generates very little interest, if the interest is $10 or more you will pay income taxes on it
the IRA plans and there are two, the original plan was you could contribute some of your already taxed income into an account that would result in a reduction of your gross income and ultimately your taxable income, thus a tax advantage when you contribute, however eventually is taxable when you take distribution, there are limits to the amount you can contribute–not open ended
the other plan the Roth has no current tax advantage, but you can contribute to the limit you are eligible, the interest is earns when you have held it five years is never taxable to you when you take distribution
You should have both for different reasons. Savings accounts are for savings for near term or emergency needs. Roth IRAs are for long term retirement savings that protect the assets from taxation.
That is the purpose of an Individual Retirement Account – to have money which is not easily accessible so that you will not have to eat cat food when you retire.
No. A Roth IRA is planning for your future retirement pension.
A savings account is for money you may need soon, and in my opinion, is a lousy investment even in the medium term, because of the near zero interest rates paid. But if you do make more than $10 of interest, it will be taxed.
A Roth is for the long term, preferably for when you reach about age 60 or older. There is no tax on the gain, so you ultimately make more than you would in other investments of the same type. Also, with the Roth IRA, you can choose more aggressive investments like Index funds that will make close to 10% a year on average, rather than the 0.1% or so a bank pays on a savings account.
As you can see, I'm a huge fan of the Roth IRA. Put what you can into it, but don't live beyond your means to do it, and also have a savings or brokerage account to cover emergencies.
One is FDIC insured, one is not.
One is more volatile than the other.
Contrary to what you've typed here, principle deposits to a Roth IRA can be withdrawn anytime without penalty of any kind.
Many, many more differences.
The interest rate, mostly, and the fact that an IRA typically grows while savings accounts don't. You're right about the early withdrawal penalty though.