Is there any reason to have a savings account if you have a Roth 401(k), which allows early withdrawal of principal? If pooled together, couldn't you get the liquidity of a savings account and, if you don't end up needing the money until retirement, the tax free growth of the Roth?

I realize there are some potential psychological benefits of having money that you don't touch until retirement, but is there any other benefits to keeping them separate?


Assuming that withdraws from the retirement account are possible: there is no way to put the money back beyond the annual maximums.

Assume this scenario:

  • have 10K in contributions and 5K in earnings.
  • Get hit with big bill because of storm damage to your house.
  • Have to pay the repair company, so pull the 10K from the retirement fund.
  • Many months later the insurance company finally agrees to pay you back, now you have a 10K check and no way to put the money back into the retirement account.
  • Time to open a savings account.

According to this document from Morgan Stanley, you can't withdraw contributions penalty-free from a Roth 401k (unlike a Roth IRA, where you can).

There are a few benefits to a savings account:

  1. Assuming your Roth is invested in stocks and/or bonds, it can lose value. If the stock market goes down at the time when you need to draw on your "savings", you can wind up taking a big bite out of your retirement. For an emergency fund, a savings account is safer as it cannot lose (nominal) value.

  2. A savings account is typically FDIC insured, so you can recover your money (up to a limit) even if the bank fails. Although this is unlikely, it's still nice to know that protection is there

  3. It is possible that tax treatment of Roth IRAs/401ks may change in the future. If you put all your savings eggs in the Roth basket and then the law changes so that a penalty is applied, you are blocked from retrieving your "savings" penalty free. (It is theoretically possible that a law could also be passed to impose penalties on withdrawals from savings accounts, but this is obviously a more remote possibility.)

  • 1
    You can't withdraw early from a Roth 401(k) (as far as I know) only Roth IRA. Jul 2 '14 at 18:15
  • @JoeTaxpayer: Interesting, I was looking that up. I can't find a clear statement from the IRS about it, though. Do you know of one?
    – BrenBarn
    Jul 2 '14 at 18:36
  • no, but there was a discussion of this on a LinkedIn group I follow. The lack of this option was cited as a big downside in the writer's opinion. Jul 2 '14 at 18:38
  • Looks like you're right about no early withdrawl from Roth 401(k): money.stackexchange.com/questions/7598/…
    – Ben
    Jul 2 '14 at 21:01

If you aren't going to use a Roth IRA for other purposes (like retirement), then go ahead.

  • Money contributed to either a savings account or a Roth IRA will have been taxed at three marginal tax rate when your earned the money.
  • Savings will grow at an interest rate of 1.0% at best, less 25% (or whatever your marginal tax rate is). In a Roth IRA, you are penalized if you withdraw more than the principal. Any earnings in a Roth IRA on the investment will not be accessible without penalty until age 59.5. The Roth IRA can lose value if the securities are not risk-free. You can also open a Roth IRA that uses certificate of deposits to grow in value. This is essentially a tax-free savings account with a $5500/year contribution limit and a withdrawal limit with earnings that are accessible at retirement.

Unless you save enough to max out your 401k contributions ($17,500) using your Roth IRA ($5500) as a tax-free savings account or personal investing account seems like a good idea.

  • "Roth IRAs will grow by 0% if you plan to take an early withdrawal of your contributions (no earnings)". There is earnings, you just can't access them tax free until retirement.
    – Ben
    Jul 3 '14 at 17:13
  • @Ben Thanks for the feedback. I reworded it to make it clearer.
    – IceArdor
    Jul 14 '14 at 5:05

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