Why is a ROTH IRA better than setting aside money in a savings account if I add post-tax dollars?

Question

Why is a ROTH IRA better than setting aside money in a savings account if I add post-tax dollars?

In: Economics

Answer 1

ROTH IRAs have tax advantages that a normal savings account doesn’t.

With a savings account, you pay tax on your income, put it in savings, and then pay tax on the interest every year as it accrues.

With a ROTH, you pay tax on your income, put it in the ROTH, and then never pay tax on that money again. Whenever you withdraw in retirement, whatever gains you have are tax-free. This can result in _considerable_ tax savings depending on how long you have the ROTH and what your tax rates are.

The disadvantage, of course, is that you can’t withdraw from a ROTH early without penalty – there are not additional penalties for withdrawing from savings.