What’s the Difference Between IRA Saving Accounts and IRA Investment Accounts?
You may not have realized it, but you can have an IRA savings-type account, an IRA investment-type account or both. Here are benefits for each.
Bottom Line Up Front
- IRA savings accounts and IRA investment accounts are both tax-advantaged accounts.
- IRA savings accounts may work best for people who want to diversify their retirement funds to include some lower-risk options.
- IRA investment accounts may work best for those interested in the potential for high growth, and who have a higher risk tolerance.
Time to Read
January 30, 2023
So, you’re thinking about opening an IRA? Congratulations! That’s a great way to set yourself up for a fulfilling retirement.
The decision to open an IRA savings or investment account depends on several factors. It’s important to consider:
- your goals and long-term strategy
- how long you have to save for retirement
- how much risk you’re willing to tolerate
What’s an IRA Account?
IRA accounts are tax-advantaged, meaning that they feature certain tax benefits designed to encourage retirement saving. Anyone with earned income can open an IRA—whether you have an employer-sponsored retirement plan (401(k), Thrift Savings Plan) or not. The 2 most popular types are:
- Traditional IRAs allow you to make pre-tax contributions that grow over time. Your funds grow tax-free until you’re ready to withdraw money at retirement. Your tax rate will be based on your income level at the time you withdraw the money, not at the time you make the contributions.
- Roth IRAs are funded with after-tax dollars, which means you make your contributions to your account after you’ve paid taxes. These funds also grow tax-free, and since you’ve already paid taxes on the money before you made your contributions, you won’t be taxed on your withdrawals.
It’s important to know that the IRS has very specific guidelines on contribution, income and age limits, required minimum distributions, and more. Check the IRS website for more details.
The Differences Between IRA Savings and Investment Accounts
Now let’s take a closer look at the features and benefits you’d enjoy with each type of account.
IRA Savings Accounts
Many people think of IRAs as brokerage accounts that help grow their retirement funds through investing. But, there are also savings-type options. They may be most attractive to those close to retirement or who want to diversify their portfolios with lower risk options. These include:
- IRA certificates (also known as IRA certificates of deposit or CDs)
- IRA savings accounts
- IRA money market savings accounts
IRA Certificates are savings accounts that earn a higher interest rate than you’d get with a traditional savings account. In exchange for agreeing to keep your money in the account for a specific amount of time, you’ll get a guaranteed return. This return isn’t tied to the ups and downs of the stock market. Your interest rate will depend on your balance and how long a term you choose.
Another notable benefit to an IRA certificate is how taxes on your interest are handled. With a regular certificate, you’d owe taxes on the interest in the year it’s paid. But, with a traditional IRA certificate, you get to delay paying the tax until you withdraw the money. With a Roth IRA certificate, your withdrawals will be tax-free because your contributions were made with after-tax dollars.
- Individuals nearing retirement who want a safe, guaranteed return
- People who want to diversify their retirement funds to include some lower-risk options
- Those who want tax-deferred growth on funds they won’t need in the near future
An IRA Savings Account or IRA Money Market Savings Account may fit the bill if you’re looking for more liquidity (easier access to your money). Both work much like regular savings accounts and are widely regarded as safer options.
Although the rates aren’t guaranteed like IRA certificates, they’re both still a good way to earn interest and grow your funds. Plus, because they’re part of your IRA, their tax benefits make them more attractive than other savings options. However, whether you choose a Traditional or Roth version, if you withdraw early (before age 59½), you’ll be subject to paying penalties, as outlined by the IRS.
- Retirees who want tax-advantaged growth on funds that are easy to access
- Those interested in diversifying their retirement to include lower risk, more liquid assets
- Risk-averse savers who want the benefits of an IRA account not tied to the stock market
IRA Investment (Brokerage) Accounts
IRA investment accounts are those that invest your money in securities (stocks, bonds, mutual funds) for your retirement fund. This type of account offers you more investment options and the potential for higher long-term growth. Your contributions are split among the investments you’ve chosen, which grow based on their performance within the stock market as a whole. However, as with any investment account, they carry a higher risk than savings options as they’re subject to market fluctuations. You can make contributions to these accounts any time throughout the year, up to the maximum annual limits set by the IRS.
- People who have a long time to save for retirement
- Those interested in the potential for high growth, and who have a higher risk tolerance
- Individuals looking for a tax-advantaged way to grow their wealth in the stock market
As a Navy Federal Credit Union member, you have access to 2 investing options.
- You can sign up for Digital Investor, our low-cost online investing tool. Digital Investor offers 2 options: automated and self-directed investing. With automated investing, our system chooses your portfolio based on your financial situation, goals, risk tolerance and overall market conditions. If you prefer to be more hands-on, a self-directed account allows you to research, choose and track your own investments. You can also have both types of accounts.
- You can work with one of our experienced Navy Federal Investment Services financial advisors. Your advisor will review your overall financial situation to help you develop a long-term financial plan. Then, you’ll work together to build a diversified portfolio based on your goals, risk tolerance and other important factors.
Navy Federal Financial Group, LLC (NFFG) is a licensed insurance agency. Non-deposit investments, brokerage, and advisory products are only sold through Navy Federal Investment Services, LLC (NFIS), a member of FINRA/SIPC and an SEC registered investment advisory firm. NFIS is a wholly owned subsidiary of NFFG. Insurance products are offered through NFFG and NFIS. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of Navy Federal Credit Union (NFCU), are not offered, recommended, sanctioned, or encouraged by the federal government, and may involve investment risk, including possible loss of principal. Deposit products and related services are provided by NFCU. Digital Investor is offered through NFIS.
Financial Advisors are employees of NFFG and they are employees and registered representatives of NFIS. NFIS and NFFG are affiliated companies under the common control of NFCU. Call 1-877-221-8108 for further information.
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.