IRA vs. Savings Account

Tax benefits offer incentives to use IRAs rather than stand-alone savings accounts.

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Individual retirement accounts are an umbrella account in which you can invest your money in a variety of ways, including putting your IRA money into a savings account. Though IRAs are designed to offer advantages over regular savings accounts if you're saving for retirement, you could run into trouble if you want your money early.

IRA Advantages

The biggest benefit to using an IRA is the tax advantage. Whether you use a traditional IRA or a Roth IRA, the money grows tax-free in the account. Traditional IRAs offer the benefit of tax-deductible contributions, but tax distributions. Roth IRAs don't give a deduction for contributions, but your qualified distributions come out tax-free. Whichever option you choose, you're getting a tax break that you wouldn't with a savings account.

IRA Disadvantages

The downside to using an IRA is the potential for early withdrawal penalties. For traditional IRAs, any distribution before age 59 1/2 is a non-qualified distribution, which is subject to the extra 10 percent tax penalty for early withdrawals. However, the downside isn't as bad for Roth IRAs because you can withdraw your contributions at any time tax-free and penalty-free. Once you've withdrawn your contributions, then your earnings are taxed and penalized. To take a qualified distribution from a Roth IRA, your account must be five years old and you must be 59 1/2, permanently disabled or using up to $10,000 for a first house purchase.

Savings Account Benefits

Savings accounts allow you to access your money when you need it without having to worry about any early withdrawal penalties. For example, if you get in a car accident and need to buy a new car, you can use your savings account without any negative tax benefits, which you might not be able to do with an IRA. In addition, there isn't a contribution limit on savings accounts. As of 2012, IRAs restrict annual contributions to $5,000 ($6,000 if you're 50 or older).

Savings Account Drawbacks

Savings accounts don't offer any tax breaks such as deductions for contributions or tax-sheltered growth. For example, each year, you must include any interest earned on the account in your taxable income for the year, which lowers the after-tax rate of return. In addition, depending on how you invest the money in your IRA, you may not be able to achieve as high a rate of return because of the security offered by savings accounts.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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