401(k) vs. Savings Account

When saving for retirement, deciding where to keep your money is just as important as determining how much to set aside. Depending on where you work, your benefits may include a 401(k) plan, or you could stash retirement funds in a regular savings account. Understanding the differences between a 401(k) vs. savings account can help you decide which option makes the most sense for your financial plan. 

Consider working with a financial advisor who can help you create financial goals and select investments to match them.

What Is a 401(k)?

A 401(k) plan is a tax-advantaged plan that employers may offer to help employees save for retirement. Traditional 401(k) plans allow you to contribute pre-tax dollars, helping lower your taxable income for the year. These plans are funded through elective salary deferrals, with the money you contribute deducted directly from your paycheck.

Employers can make matching contributions to employee 401(k) plans, although not all companies do so. If an employer offers a match, it usually caps the amount. For instance, your employer may match 50% or 100% of your contributions each year, up to 6% of your salary. That is essentially free money you can get just for saving in your employer’s plan.

You can withdraw money from your 401(k) without a penalty once you turn 59 ½. Any qualified withdrawals you make from a traditional 401(k) are taxed at your ordinary income tax rate; however, early withdrawals may be subject to a 10% tax penalty. Once you turn 72, you are required to take minimum distributions from your plan, unless you are still working. RMDs are based on your account balance and life expectancy, and failing to take them on time can result in a tax penalty.

What Is a Savings Account?

A savings account is a deposit account that allows you to add money and earn interest on your balance. You can open savings accounts at traditional banks, online banks or credit unions. The rate you earn on savings and the fees you will pay can depend on where you bank. Online banks tend to offer the best combination of high rates and low fees.

Savings accounts allow you to withdraw money as needed, although withdrawals are typically not unlimited. Federal regulations no longer limit you to six withdrawals per month, but banks can still impose that limit. If you make more than six withdrawals in a month, the bank can charge you an excessive withdrawal fee.

Some accounts may require a minimum initial deposit to open a savings account. There may also be minimum balance requirements to avoid a monthly maintenance fee, but to avoid this, you can link a savings account to a checking account for convenient transfers. Some banks also offer complimentary ATM cards with savings accounts.

401(k) vs. Savings Account: What’s the Difference?

A 401(k) is a tax-advantaged plan specifically designed for retirement savings. The IRS regulates 401(k) plans and sets the rules for who can contribute and how much. The IRS also determines the tax treatment of both contributions and withdrawals.

The money you put into a 401(k) can be invested in mutual funds, exchange-traded funds (ETFs) and other types of investments. Contributions to a traditional 401(k) grow on a tax-deferred basis, meaning you only pay tax on earnings when you begin taking distributions. The value of your 401(k) can go up or down over time, based on the performance of your investments.

Some employers may offer a Roth 401(k) alongside traditional plans. With a Roth 401(k), contributions are made using after-tax dollars. That means you will not pay tax on qualified distributions in retirement. You may, however, still face tax penalties for early withdrawals before age 59 ½. Unlike Roth IRAs, Roth 401(k) accounts are subject to RMD rules.

Savings accounts do not offer any tax benefits, nor do they have the same growth potential. Instead, a savings account is intended to be a safe, secure place to keep your money until you need to spend it. Savings accounts at FDIC-member banks are protected up to the standard coverage limit of $250,000 per depositor, per account ownership type and per financial institution. The National Credit Union Administration (NCUA) extends similar coverage to savings accounts held at member credit unions.

You can make deposits to a savings account at your own pace, and there is no limit restricting how much you can deposit. You can withdraw money from a savings account up to the allowed number of times per month without any tax penalties.

401(k) vs. Savings Account: Where Should You Put Your Money?

The best account for your money depends on your financial goals and overall retirement plan. A 401(k) can help you save money for retirement while enjoying some tax breaks. If you have access to a 401(k) at work, taking advantage of it can be a smart move. Regular contributions to a tax-advantaged retirement plan, even in small amounts, can add up over time through the power of compounding interest.

For 2025, the contribution limits allow for up to $23,500 toward a 401(k) plan. You can also make an additional catch-up contribution of $7,500 if you are age 50 or older. This amount can increase to $11,250 for those ages 60 to 63. If you are able to max out both your plan contributions and matching employer contributions, you could save a significant amount of money toward your retirement goals.

Again, you typically cannot withdraw money before age 59 ½ without a tax penalty. You can, however, avoid the penalty using the Rule of 55. That rule allows you to take early distributions from a 401(k) penalty-free if you leave your job during the year you turn 55.

Savings accounts can also be used for retirement savings, but they are typically better suited for other financial goals. For example, you might use a high-yield savings account to hold your emergency fund. If you have an unexpected expense, you can withdraw or transfer funds as needed. You may also use a savings account for other goals, too, such as saving for a vacation, a new car or a wedding.

The good news is that you do not have to choose between a 401(k) vs. a savings account. You can have both and use them to build financial security in different ways. Your 401(k) can be earmarked for retirement while you add money to a savings account to fund other goals. 

Be sure to consult your financial advisor before choosing how much to allocate toward your monthly savings.

Pros and Cons of a 401(k) vs. a Savings Account

This quick comparison of the advantages and disadvantages of a 401(k) vs. a savings account can help you determine if these options are right for you.. 

Both can play important roles in your financial plan. The key is knowing when and how to use each effectively.

How to Prioritize: When to Save vs. When to Invest

If you are not sure whether to focus on saving or investing first, these guidelines can help.

• Start by building an emergency fund. Aim to save at least 3 to 6 months’ worth of essential expenses in a savings account. This emergency fund will help provide protection  against unexpected events like job loss or medical bills.
  
• Pay off high-interest debt. If you have credit card balances or other high-interest loans, it usually makes sense to pay these down before investing because the guaranteed return from eliminating high-interest debt often outweighs investment gains.
  
• Contribute enough to get your 401(k) match. If your employer offers a 401(k) match, try to contribute at least enough to get the full match. This is essentially free money and a great return on your contributions.
  
• Grow your investments for long-term goals. Once your emergency fund is in place, your high-interest debt is paid and you are receiving the 401(k) match, you can start putting more toward investments for retirement or other long-term goals.

Bottom Line

A 401(k) plan can be a powerful tool for building wealth. The sooner you start saving, the more time you have to capitalize on compounding interest. A savings account, meanwhile, can offer liquidity and flexibility. Knowing how they differ and how they work can help you determine whether they have a place in your financial plan.

Work with a financial advisor to create an investment strategy that suits your long-term goals and helps you save for retirement.

Tips for Retirement

• Consider talking to your financial advisor about how to make the most of your 401(k) if you have one and the best ways to use savings accounts. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you have a 401(k), it can be helpful to review your plan annually to ensure that you’re on track with your retirement goals. For example, you may need or want to increase your contribution rate or change up your investments to try to boost returns. It’s also important to consider the fees you’re paying for your 401(k). Excessive 401(k) fees can detract from your returns so it may be worthwhile to shift into lower-fee investments.

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