If you have been wondering whether to stash your money into a savings account or Roth IRA, don’t assume that one is always the wiser choice. In much of the financial literature, on investing websites, and even in business school textbooks, it’s common to see savings accounts receive the brunt of the criticism. But, it shouldn’t be that way.
Why? Because the two financial arrangements are very different creatures, designed to do quite different things. Here’s a quick look at the key points to keep in mind if you intend to store your capital in one of the two.
Roth IRA’s are the big winners when it comes to the tax aspect. That’s because after you pay taxes on the initial amount (before depositing it into the IRA), you need not pay tax on the interest earned during the life of the account, even when you withdraw the money years in the future.
With savings accounts, you put “taxed” money into it, just as you do with the Roth IRA. But, as you receive interest from the deposits, it’s necessary to pay tax on any annual gains. So, in the area of taxation, the Roth IRA has the advantage.
Free Use of Your Own Money
With good comes bad. In other words, even though you legally avoid paying tax on interest in a Roth, you can’t always pull the money out and use it whenever you want, as is the case with traditional savings accounts.