What’s the Difference Between IRA Savings Accounts and IRA Investment Accounts?

So, you’re thinking about opening an individual retirement account (IRA)? Congratulations! That’s a great way to set yourself up for a fulfilling retirement. 

The decision to open an IRA is especially important now. According to recent studies by the Pew Charitable Trusts, 51% of Americans worry they’ll run out of money in retirement. And 70% of retirees say they wish they had started saving for retirement earlier. 

To avoid falling into this situation, your best bet is to have a solid retirement savings plan in place and re-evaluate it over time. Learning about the different types of IRAs is key to securing the best option for you.

The decision to open an IRA savings account or IRA investment account depends on several factors. It’s important to consider:

• your goals and long-term strategy
• how much time you have to save for retirement
• how much risk you’re willing to tolerate

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 options. They may be most appealing to people who are 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 IRA CDs)
• IRA savings accounts 
• IRA money market savings accounts

IRA certificates are savings accounts that generally 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, and ultimately annual percentage yield (APY), will depend on your balance and how long a term you choose.

Another benefit of IRA certificates is how the taxes on your interest are handled. With a regular certificate, you’d owe taxes on the interest in the year it’s paid. With a traditional IRA certificate, you get to delay paying the tax until you withdraw the money. And with a Roth IRA certificate, your withdrawals will be tax-free because your contributions were made with after-tax dollars. 

These accounts are best for:

• people nearing retirement who want a safe, guaranteed return 
• people who want to diversify their retirement funds to include some lower-risk options
• people who want tax-deferred growth on funds they won’t need soon

An IRA Savings Account or IRA Money Market Savings Account may fit the bill if you’re looking for more “liquidity,” or easier access to your money. Both types of accounts work like regular savings accounts and are widely regarded as safer options.  

Although the rates aren’t guaranteed like IRA certificates, they’re both good ways to earn interest and grow your funds. And because they’re part of your IRA, their tax benefits make them more appealing than other savings options. If you withdraw early (before age 59½) from a traditional IRA or Roth IRA account, you’ll be subject to paying penalties, according to IRS guidelines. 

These accounts are best for:

• retirees who want tax-advantaged growth on funds that are easy to access
• people who want to diversify their retirement to include lower risk and increase their liquid assets
• risk-averse savers who want the benefits of an IRA account that’s not tied to the stock market 

IRA investment account features

IRA investment accounts 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 greater long-term growth. 

Your contributions are split among the investments you choose, and they grow based on their performance within the stock market. As with any investment account, they carry a higher risk than savings options because they’re subject to market fluctuations. You can make contributions to these accounts anytime throughout the year, up to the maximum annual limits set by the IRS. 

These accounts are best for:

• people who have a long time to save for retirement
• people who are interested in the potential for high growth and who have a higher risk tolerance
• people looking for a tax-advantaged way to grow their wealth in the stock market

Navy Federal can help you with your retirement investing goals 

As a Navy Federal 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.

Try our retirement income calculator

Wondering how return rates will affect you over time? Check at any point in your investment journey with our retirement income calculator.