A Roth IRA is a special kind of investment vehicle that has many advantages over a traditional savings account, but also has a component of risk. In a traditional savings account, you put your money into a bank account, and it is safe, but it gains a very small amount of interest. Nowadays, the interest rates that banks offer on savings accounts tend to be close to zero, so they are below the rate of inflation.
Understanding the Differences Between IRA and Traditional Savings Account
An IRA, or Individual Retirement Account, is a special investment account that every American is entitled to use. Normally, when you invest money by, for example, buying a stock, your investment is taxed twice. First, it is taxed when you earn money as income. Then, it is taxed again after you sell the investment for the money. If you put your money into an IRA, then you can legally avoid one of these two taxation events. IRAs are designed by the government to encourage saving for retirement by lowering the tax costs of doing so.
Advantages of a Roth IRA
A Roth IRA is the type that removes the taxation when selling the investment. So you will pay tax on money that you earn, then deposit it into the Roth IRA and use the money to buy investments. Years later, when you want to sell the investments, the income from selling them is not taxable.
When you invest, you do run the risk that the investments will decline in value, but the potential gains are much larger than with a traditional savings account. Be sure to speak with a licensed financial advisor to get advice before making an investment strategy.