Sometimes, you need that strong kick in your financial life to plan events, whether it’s about financial planning for retirement, buying your dream home, doing financial planning for your family, wanting to buy a car, and whatnot.
Roth IRA vs High Yield Savings Account, which fits your requirements, makes you slip into unbroken thinking of how intimidating it is to plan it. And there you go, coming to your senses makes you realize where to start.
The reality check is that the sooner you start making meaningful investments and saving, the better. Now, you might be thinking, where should you put all your money to secure your future?
Well, shoot down your worries as this post will map out a comparison between Roth IRA vs High Yield Savings accounts (HYS) and get an inch closer to achieve your financial goals.
Table of Contents
What is a Roth IRA Account?
A Roth IRA account is a retirement savings account that helps you contribute after-tax income to an account where your accrued income (it’s revenue that’s earned but is yet to be received) will be tax-free.
Roth IRAs offer tax-free income during retirement, making them a popular option for achieving long-term financial goals. They help you grow your money by investing your contributions into a diverse portfolio of bonds, ETFs (Exchange Traded Funds), stocks, and more.
Below, you’ll walk through the benefits of a Roth IRA:
Tax-Free Withdrawals and Growth
One of the primary benefits of going with a Roth IRA is its potential to offer tax-free growth and withdrawals.
Since you contribute to your after-tax income, the savings in your Roth IRA can multiply, and you can make tax-free withdrawals during retirement. In all, it results in increasing your retirement savings.
No Age Limitation
There’s no age restriction when making contributions, unlike traditional retirement accounts. You don’t need to make any mandatory withdrawals during your entire lifetime. This allows you to make frequent contributions to your Roth IRA as long as you wish. For people aged 72 or older, this account type is the best choice to make savings.
Roth IRA Doesn’t Have Required Distributions
Except Roth IRA, every account, including traditional IRA, traditional 401(k), Roth 401(k), and high-yield savings accounts have required distributions, also known as RMDs.
As the name suggests, RMD compels you to at least take a minimum distribution from your account annually. In RMD, it’ll be mandatory for you to withdraw money whether it’s of any use for you or not. And this implies there will be taxes and a halt to the tax-advantaged compound interest within your account.
But the Roth IRA completely keeps away RMDs (Required Minimum Distributions), indicating you can compound as long as you want to and pass this untouched money to your future generations.
Pass on Tax-Free Money to Heirs
A Roth IRA is undeniably an unmatched wealth transfer machine. Do you know how? Roth IRA allows you to pass any amount of money in the account tax-free to your heirs or beneficiaries.
Depending on various conditions, heirs (first in line for inheritance) can possibly skyrocket their savings tax-free for years and in fact, for decades. Also, other heirs (adoptive heir, collateral heirs, and presumptive heir), likely require distributing all the assets in the account within 10 years of the death of the owner.
Distributions will be tax-free to recipients/successors when your money is held in a Roth IRA. Roth IRA offers you plenty of tax-free alternatives for the transfer of your heirs.
*Adoptive Heir – Those who hold the same rights as biological children.
*Collateral Heir – The who is a blood relative but is not a direct successor
*Presumptive Heir – These are heirs whose rights may be defeated.
Downside of Roth IRA
Among a bunch of benefits the Roth IRA has, look down to a few limitations that it holds.
First, a very common pitfall of contributing to a Roth IRA is that your contributions are made with after-tax dollars, contrary to traditional IRAs or 401(k) plans. This implies that you can’t take the tax advantage within the same year you’ve made the contribution. However, it will benefit you in the long run when you won’t owe taxes on withdrawals during retirement.
The second disadvantage of Roth IRAs is that people of not all ages can contribute to them. Once you attain a certain income level, the amount you can contribute decreases and is sooner or later eliminated at a certain income level. Nonetheless, with the different alternatives mentioned above, you can cut off all this with the help of a backdoor Roth IRA.
Best Roth IRA Accounts to Open in 2024
| S. No. | Provider | Best Known for | Commission | Minimum Amount to Open ($) |
| 1. | Charles Schwab | Investor Education | $0 | 0 |
| 2. | Betterment | Automated Investing With Access to Human Advice | Management fee: 0.25 – 0.40 percent of assets annually | 0 |
| 3. | Fidelity Investments (Overall Best) | Active Investors Seeking Full-Service Brokerage Features | $0 | 0 |
| 4. | Interactive Brokers | Wide Range of Global Assets | $1 minimum/$0 with IBKR Lite | 0 |
| 5. | Wealthfront | Truly Hands-Off Approach to Investing | Management fee: 0.25 percent of assets annually | 500 |
| 6. | Vanguard | Access to Low Cost Mutual Funds | $0 | 0 |
| 7. | Merrill Edge | Existing Bank of America customers | $0 | 0 |
| 8. | E*TRADE | Mobile Investors | No commission for stock, mutual fund, and ETF. Options are $0.50-$0.65 per contract, depending on trading volume. | 0 |
| 9. | M1 Finance | Active Investors Seeking Automated Tools | 0%; $36 per year for M1 Plus ($3/month, 3 months free for new users) | $100 ($500 minimum for retirement accounts) |
*Important Note: The rates listed above are as of current June 2024 and are subject to change.
What is High Yield Savings?
A high-yield savings account provides a higher rate of interest than a usual savings account. Such accounts offer customers a secure way to stash their money and have the advantage of having a competitive annual percentage yield (APY). There are several ways you can earn higher returns on your savings account.
Moreover, you can open high-yield savings to save for anything, like short-term, long-term, and mid-term financial goals that cover emergency funds, paying off mortgages, planning for vacations, making down payments to buy a dream car or home, and so much more.
Competing APYs
The interest rates of high-yield savings accounts are higher than any standard savings account. At the same time, these interest rates may vary depending on economic factors and financial institutions.
Usually, these accounts take a clear lead over traditional savings accounts and assist you in growing your money faster with time.
Accessing Funds is Hassle-Free
High-yield savings accounts contribute to growing your money
while making it accessible for you. Easy deposits and withdrawal of funds per your requirements without any limitations or penalties.
These deposits and withdrawals also depend on your chosen bank’s withdrawal policies. Such flexibility and versatility are beneficial for short-term or long-term financial goals, such as emergency expenses.
Best High-Yield Savings Accounts in 2024
| S.No. | High-Yield Savings Bank Account | APY (%) | Minimum Deposit ($) | Minimum Balance to Earn APY ($) | Monthly Fee ($) |
| 1. | My Banking Direct | 5.35 | 500 | 1 | 0 |
| 2. | Western Alliance Bank High-Yield Savings Premier | 5.36 | 500 | 0.01 | 0 |
| 3. | UFB Direct Savings | 5.25 | 0 | 0.01 | 0 |
| 4. | Bread Savings | 5.15 | 100 | 0.01 | 0 |
| 5. | Bask Bank Savings | 5.10 | 0 | 0.01 | 0 |
| 6. | Betterment | 5 | 10 | 0.01 | 0 |
| 7. | CIT Bank Platinum Savings | 5 | 100 | 5,000 | 0 |
| 8. | Newtek Bank (Personal High-Yield Savings) | 5.25 | 0 | 0.01 | 0 |
| 9. | Laurel Road High Savings Account | 5.15 | 0 | 0 | 0 |
| 10. | LendingClub | 5 | 100 | 0 | 0 |
| 11. | Salem Five Direct eOne Savings | 5.01 | 10 | 10 | 0 |
| 12. | Popular Direct High-yield Savings Account | 5.15 | 100 | 100 | 0 |
*Important Note: The rates listed above are current as of August 2024 and are subject to change.
Saving with Both Accounts
Instead of making a tough call between a Roth IRA and a High-yield savings account, how about going with both? Yes, you heard that right! Many financial experts recommend using both these accounts to maximize your savings.
Looking forward to knowing how? Here’s how you can skyrocket your savings from these accounts:
Building an Emergency Fund
You can hit the jackpot of savings by building emergency funds in a high-yield savings account.
Emergency funds require at least 3-6 months of savings as an umbrella for unexpected situations.
Retirement Savings
Once you’re done with emergency funds, make room for contributions to your Roth IRA. Also, take advantage of your potential growth and let your contributions multiply over time. If possible, maximize your annual contributions to achieve long-term financial goals directly.
Roth IRA vs High Yield Savings – Key Differences
This section comprises different factors that contribute to a detailed Roth IRA vs High Yield Savings Accounts! So have a look below:
Contribution Limits & Deadlines
When you talk about a high-yield savings account, it has no contribution limits. You can easily open an account anytime and anywhere and contribute as much money as you wish.
As high-yield savings accounts are known for offering unique flexibility, Roth IRAs don’t offer you the same features or versatility. Furthermore, Roth IRAs involve annual contribution limits that the IRS sets. Therefore, making contributions before tax day of the coming year becomes a must.
Success Potential
Roth Individual Retirement Account encompasses great growth potential that benefits in attaining your long-term financial goals compared to high-yield savings accounts.
Moreover, where high-yield savings accounts offer fixed returns to consumers, Roth IRAs give investors plenty of choices, which they can make via bonds, stocks, MFs (mutual funds), and ETFs (Electronic Fund Transfer).
Risk Factor & Return Rates
When you decide to open a high-yield savings account, you don’t need to worry about any risk as it offers a guaranteed return.
With a Roth IRA, you can increase your savings, but with a twist. Contribution to these accounts may result in a bit of risk. Therefore, you need to make a wise choice considering which asset is right for a Roth IRA, as picking up this financial route, without any doubt, offers you higher returns.
Withdrawal Flexibility
Both high-yield savings accounts and Roth IRAs offer unmatched withdrawal flexibility whenever you feel like you can withdraw funds from either a high-yield savings account or a Roth IRA.
During an emergency, investors can withdraw money from these accounts and maintain funds in the account to maximize compounding or compound interest.
Earnings in the capital gains and dividends are the only limitation that’ll hold you from opening this account. If your age is 59 1⁄2 years and you’ve held your contributions for at least five years in a Roth IRA, you can make penalty-free withdrawals from your earnings and contributions.
Tax Considerations
A high-yield savings account’s interest is taxable, and it’s known as taxable income.
On the other hand, you don’t owe taxes on a Roth IRA and get the advantage of keeping all of your profits.
The Final Call: Roth IRA vs High Yield Savings Account
It is difficult to decide between a Roth IRA vs high yield savings account which one is right for you? Hold on—we’re here to simplify things for you!
Without any limit on contributions, high-yield savings accounts offer its investors risk-free returns.
When it comes to Roth IRAs, contributions are limited as they’re sanctioned by the IRS and involve greater risks. However, a Roth IRA offers long-term returns that outperform a high-yield savings account. You can check this guide to understand Roth IRA vs savings Account.
The important thing to note here is that investors must analyze their financial goals and risk tolerances when making the final call and determine which account fits the bill for them!
Still confused? Putting all your problems to rest, you can use both accounts on your path to retirement! Isn’t it the best thing? It’s like getting the best of both worlds!
Till then, Happy Savings!
