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?

3 Answers 3


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, 2014 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, 2014 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, 2014 at 18:38
  • Looks like you're right about no early withdrawl from Roth 401(k): money.stackexchange.com/questions/7598/…
    – Ben
    Jul 2, 2014 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, 2014 at 17:13
  • @Ben Thanks for the feedback. I reworded it to make it clearer.
    – IceArdor
    Jul 14, 2014 at 5:05

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