You might be unsure about how to best save up for your retirement, especially if you do not have a background in finance. One of the most common questions when it comes to retirement savings is the differences between a Roth IRA and a traditional savings account. If you want to learn about a Roth IRA vs traditional savings, then read on.
A traditional savings account is a bank account that you open with a regular consumer bank. You can deposit money into it from your paycheck or other income. These accounts tend to have very low interest rates, so they grow very slowly– often they grow more slowly than inflation. That means they actually lose value over time. However, these accounts have the advantage of safety. They are insured by the FDIC up to $250,000, and in practice you will never need to worry about anything happening to that money.
Roth IRA
A Roth IRA, or individual retirement account, is an investment account. You take some of your income and add it to the Roth IRA after paying taxes on it. Then you can invest that money in stocks, bonds, mutual funds, ETFs, and other financial instruments. It will grow much faster than in a savings account, but it does carry the risk of loss if the investments turn out badly. Usually, an IRA is operated by a financial services company, and that company will offer you a set of funds and plans to choose from so that you don’t have to monitor the individual investment choices.