Roth IRAs, savings accounts, and brokerage accounts are all financial products that allow individuals to invest their money. However, these three types of accounts have significant differences that make them better suited to different types of investors.
Investors need to be familiar with these different types of accounts so they can make sound financial decisions. By the end of this article, you’ll know the fundamentals of savings accounts, brokerage accounts, and Roth IRAs, as well as their pros and cons.
What is a Savings Account?
You deposit money in a savings account with a financial institution that uses your funds to make investments. Rather than paying you the gain or loss from those investments, the financial institution pays you an interest rate as long as they hold your funds.
Savings accounts are virtually risk-free: you’re guaranteed to earn a set percentage back on your investment (although your financial institution may change its interest rates over time). A savings account may have a limit on the number of withdrawals investors can make in a certain time limit—because of this, savings accounts are less flexible than checking accounts, but offer a small return in exchange for holding your money.
What is a Brokerage Account?
Brokers act as intermediaries between individual investors. In exchange for facilitating transactions between buyers and sellers, brokers charge a fee for each trade. A brokerage account is an account an individual investor needs to trade securities with other investors.
Brokerage accounts allow investors to buy and sell a wide variety of securities such as stocks, bonds, and mutual funds. Unlike a savings account, investors are not guaranteed a return. Since this type of investment is generally higher risk, the potential upsides are usually greater as well.
What is a Roth IRA?
A Roth IRA is a type of retirement account that allows investors to grow their money tax-free. Unlike a traditional IRA which uses pre-tax dollars (with investors paying taxes when they withdraw their funds), a Roth IRA uses after-tax dollars. The unique benefit of a Roth IRA is investors pay their income tax upfront, meaning they don’t pay an additional tax when they withdraw their funds in retirement.
At some institutions, Roth IRAs can also be more flexible than other types of accounts. For example, iTrustCapital allows investors to buy and sell gold, silver, and cryptocurrency in a self-directed IRA.
What Are the Pros and Cons?
Each type of account has unique pros and cons. The best account for you depends on your individual financial goals, but there are some general benefits and drawbacks you should keep in mind:
Pros and Cons of Savings Accounts
A savings account’s biggest benefit is it is safe and consistent. However, most savings account interest rates fall well under inflation rates, so while the dollar amount of your money increases, your spending power could be decreasing.
Savings accounts are great for investors who want a safe place to keep their money and would rather receive a guaranteed interest rate than take a risk on a higher potential return.
Pros and Cons of Brokerage Accounts
While brokerage accounts connect investors, they also typically charge fees for each trade. Brokerage accounts are limited to the traditional securities market, which means investing in alternative assets like precious metals or cryptocurrency is off-limits.
While the S&P 500 usually grows by an average of about 10% per year (far higher than most savings accounts), no brokerage account is fully risk-free. Unlike a savings account, brokerage accounts are subject to the whims of the market, and significant market crashes are not uncommon.
Pros and Cons of a Roth IRA
The difference between a Roth IRA and a savings account is that while a savings account is limited to a low-interest rate, a Roth IRA is tied to market performance. That means that like a brokerage account, Roth IRAs have the potential for exponential growth, but unlike a brokerage account, Roth IRAs accumulate those gains tax-free.
Is a Roth IRA better than a savings account? While it’s true that Roth IRAs have historically outperformed savings accounts, Roth IRAs are more volatile since they’re based on market performance. That means that while Roth IRAs require a slightly higher risk tolerance than savings accounts, they also have significantly higher potential returns.
The biggest reason to consider a Roth IRA is that iTrustCapital allows investors to invest in cryptocurrency and precious metals through self-directed IRAs. These special IRAs give investors more control over their future by allowing them to invest in a wider variety of assets.
Invest in Your Future with iTrustCapital
iTrustCapital allows individuals to prepare for retirement by investing in precious metals like physical gold and silver along with cryptocurrency—all through tax-advantaged IRAs!
With a Roth IRA through iTrustCapital, you can take advantage of savings and brokerage accounts' strengths by investing in alternative assets with a convenient investment platform.
Ready to open a tax-advantaged IRA? Sign up today!
DISCLAIMER
This article is for information purposes only. It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.
iTrustCapital is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.
Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.
Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.
iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.
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