Why Have Both IRAs and Saving Accounts?

Any person who wants to save as much money as early as they can should consider having both an individual retirement account (IRA) and a saving account, but some might not know the difference. Both do offer to put your money safe until you need it, but their methods aren’t exactly the same, and for good reasons.

Here are the things you need to remember when opting for IRAs and savings accounts, and why it’s important to keep both in your pockets to avoid rocky finances:

Savings Accounts

Savings accounts are better for payments you’d need in the short term. These includes daily, monthly, and yearly expenses in different accounts you should have the ability to maintain. 

! Keep in mind that no two financial institutions operate the same way, so while exploring these options, consider what you need out of your accounts first. 

Advantages

• You can withdraw your savings at any time, which is great for financial emergencies and monthly expenses like rent, groceries, electric, and water bills.
• Money in savings accounts don’t lose their value, making them easily accessible whenever you need them.
• You can keep your savings account for the rest of your life!
• It enables account owners to earn from benchmark interest rates influenced by your country’s inflation, merely because your savings accounts are open. 
• A good example of this is a rewards savings account where some banks give users extra rewards for doing business with them. 
• High-interest savings accounts, on the other hand, allow some banks to give accounts a significantly higher interest than the industry average. 

Disadvantages

• You have to keep a minimum balance in your account per month. The minimum depends on the banks themselves.
• Most banks limit withdrawals to 6 times a month in maximum. 
• These accounts typically require you to pay taxes in accordance to inflation, which could be pricy.

Individual Retirement Accounts (IRAs)

An IRA, which usually doesn’t need to involve bank accounts, are better for long-term savings. As the term suggests, this is the money you’ll get to take as soon as you reach your country’s retirement age. By then, you can worry much less about what you spend on vacations and leisure!

Advantages of an IRA

• Compared to savings accounts, all contributions are tax-advantaged. These include:
  • Tax-deferral: investments that have tax deductions on the full amount of an investment.
  • Tax-exempt: provides future tax benefits due to withdrawals not subject to taxes. 
  • Other tax-advantaged benefits shelter an investor’s income from taxation to reduce their taxes. Most bank accounts don’t offer this. 
• Some employers offer their own IRA benefits!
  • Roth IRAs even allow earnings to grow tax-free without a required minimum distribution.
• IRAs may allow its users to branch into a brokerage account, which could be a source of multiple streams of both short-term and long-term income. 
  • That said, it could be used as a savings account via exchange traded funds (ETFs) and mutual funds! 
  • These also help account owners to buy and sell stocks and investments.
• You don’t have to pay taxes on your contributions until you withdraw your funds, which is typically at the retirement age. 

Disadvantages

• IRAs aren’t as accessible as savings account. If you want to withdraw your earnings prior to retirement, you’ll have to pay for it.
• If not, will have to pay taxes for their contributions as soon as you retire and redeem the investment. 
• After you reach retirement age, you’re not allowed to make any contributions or get more advantages anymore. 

Why you need both 

It’s easy to say that “long-term vs short-term” is the only benefit you’ll be able to get with these options. But within these terms includes a multitude of opportunities, like being able to save up for a full college degree or being able to keep money away to travel the world. 

When you get the money you earned is merely a bonus for what you actually get with them. Using these two kinds of accounts allow you to think of your money less to prioritize the things that matter on the daily over what you need to spend on alongside the economic and health benefits you can get with them. 

It’s best to leave your money where experts can take care of it—each account has its own expertise and obligations to maximize what you achieved while helping the institution you choose. Using both of these accounts keeps you on your toes as long as you’re honest about your financial goals and why you want to get there. Your chosen broker, partner, and/or advisor will help you with the “how.”