IRA vs. High-Yield Savings Account: What’s the Difference?

What Is an IRA?

An IRA is a tax-advantaged account used to save for retirement. Unlike a 401(k) or other employer-based retirement plan, an IRA is self-directed: You open and manage your account yourself. Although you can keep your IRA funds in savings or another type of cash account, many people invest their IRAs in a mixture of exchange-traded funds (ETFs), mutual funds, stocks and bonds.

There are two main types of IRAs: traditional IRAs and Roth IRAs.

• Traditional IRAs allow you to exclude contributions from your taxable income, reducing your tax bill in the year you contribute. Money in your account grows tax deferred, so you don't pay taxes on capital gains, interest or dividends along the way. Withdrawals made from a traditional IRA are taxable as ordinary income.
• Roth IRAs are funded with after-tax dollars, so you don't get a tax deduction when you contribute. However, earnings and qualified withdrawals are tax-free.

Learn more: Roth IRA vs. Traditional IRA: What's the Difference?

In addition to traditional and Roth IRAs, other types of IRAs exist for specialized situations:

• SEP IRA: For self-employed people, a SEP IRA acts like a workplace retirement plan, with significantly higher contribution limits than regular IRAs. For 2025, the SEP IRA contribution limit is $70,000 or 25% of total compensation, whichever is less.
• SIMPLE IRA: SIMPLE IRAs are also for self-employed people and businesses. They have higher contribution limits than regular IRAs and may allow for employer matching.
• Rollover IRA: A rollover IRA allows you to move funds from one IRA to another, or from a 401(k) with a former employer to a new IRA, without triggering a withdrawal penalty.
• Spousal IRA: Spousal IRAs are for non-working or low-income spouses, who can use their spouses' incomes to qualify for IRA contribution.

What Is a High-Yield Savings Account?

High-yield savings accounts pay a higher annual percentage yield (APY) than regular savings accounts, making them a safe, low-risk option for savers who want a higher return. High-yield savings accounts are available through banks and credit unions, and are often a feature at online-only banks.

High-yield savings accounts function just like any savings account, though some may have minimum balance requirements, monthly fees and transaction limits. Interest rates on high-yield savings accounts are variable, so today's high rate might be lower (or even higher) in the future.

IRA vs. High-Yield Savings Account

Because they're used for different purposes, IRAs and high-yield savings accounts differ in several ways. However, they also do have some similarities.

Similarities Between IRAs and High-Yield Savings Accounts

While IRAs and high-yield savings accounts have a lot of differences, they do have a few things in common:

• Both are great ways to save money for the long term as part of a retirement savings strategy.
• IRAs and high-yield savings accounts can grow in value.
• You can open high-yield savings accounts and multiple types of IRAs at a variety of banks and financial institutions.
• If you're looking to open an account for a child, you can easily open a high-yield savings account for a minor. Custodial IRAs can be opened for minor children who have income of their own.

Learn more: How to Open a High-Yield Savings Account

Differences Between IRAs and High-Yield Savings Accounts

Here are some key differences between IRAs and high-yield savings accounts.

Should You Get an IRA or a High-Yield Savings Account?

Both IRAs and high-yield savings accounts are great options when you have money to save. Which one works best for you might depend on where your current priorities lie. Here are a few considerations to take into account.

Consider an IRA If:

• You want to prioritize saving for retirement. Tax benefits allow you to keep more of your money in your IRA account (instead of sending it to the IRS), making it possible for your money to grow.
• You don't have a workplace retirement plan. If you don't have a 401(k) at work, an IRA lets you save on your own with similar tax advantages.
• You want to diversify or increase your retirement funds. For example, a Roth IRA complements your traditional 401(k) by adding a tax-free income option in retirement. If you want to contribute more than your 401(k) maximum, you can add an IRA to the mix.
• You want to invest without increasing your yearly tax bill. When you invest within an IRA, you don't pay taxes on your gains and earnings as you go. With a traditional IRA, you'll pay taxes on your money when you withdraw it. With a Roth, your earnings are tax-free. Either way, you won't pay taxes on earnings inside your IRA accounts.
• You don't need to access the money until you retire. Early withdrawal penalties can be costly. Also, investment funds aren't liquid: You'll need to sell in order to pull out cash, which is more time-consuming and complicated than taking money out of your savings.

Learn more: How to Save Money for Retirement

Consider a High-Yield Savings Account If:

• You're building an emergency fund. Devote as much money as you want to your emergency savings; you don't have to contend with contribution limits. You can also withdraw funds whenever you need to, which is key in an emergency.
• You have savings goals. While a high-yield savings account is also great for general-purpose savings, higher interest rates help you get to big savings goals faster, whether you're saving up for a home purchase or grad school expenses.
• You want to limit your risk. Although your upside is limited with a savings account, you won't lose money.
• You aren't ready to invest. If you're not comfortable with the idea of managing your own investments—even with the help of a financial planner or robo-advisor—you might want to learn more about investing before you dive in.
• You've maxed out your retirement at work. If you're already contributing the maximum to your workplace 401(k), your next priority might be an emergency fund or saving for a big goal like a down payment on a car or house.

Frequently Asked Questions

The Bottom Line

Both high-yield savings accounts and IRAs are excellent choices for saving money, depending on your goals. Think through your long-term intentions and pick the option that gives you what you need now. Ultimately, you may decide you want both high-yield savings and tax-advantaged IRA accounts as your resources—and financial needs—grow.