What Is The UK Equivalent of a Roth IRA?

Want to make some serious passive income on the back of your savings? I don’t blame you – and if you’ve spent any time in the US, you may have heard of a fantastic saving option known as the Roth IRA. It’s an efficient way to both save cash and make money over time. But – is there a Roth IRA UK equivalent? Is there a UK version of the Roth IRA?

The great news is there are several different ISAs that allow you to grow your money in much the same way you’d expect with a Roth IRA. Below, I’ll take you through what the Roth IRA itself involves, and what your closest options are based here in the UK.

What is a Roth IRA?

The Roth IRA is a specific type of savings and investment account targeted towards retirement that lets US investors holders retain and grow their holdings in a tax-free manner. It’s one of the most enduring savings options out there!

The Roth IRA is built for after-tax income. Account holders can deposit up to $6,000 per year if they’re under 50 and up to $7,000 if you’re 50 or older. As the Roth IRA allows you to hold various types of investments, the returns will be driven based on what you invest in. If this sounds familiar, it’s because there are a few ISAs set up in a similar way in the UK.

One of the biggest perks of the Roth IRA is the fact that you can withdraw contributions you make without having to pay any extra fees. Keep in mind, of course, that it’s built for retirees – meaning you’ll need to be at least 59 and a half years of age to remove funds! There are a few exceptions that apply – but if you’re in the UK, you probably won’t need to worry about them.

If you are below 59 and a half in age or have had the account for less than 5 years, you can’t withdraw capital gains from this type of account. but it’s easy enough to set up and offers more flexibility than a lot of alternative savers.

Is there an exact match for the Roth IRA in the UK?

As US and UK savings and tax systems differ in many ways, there’s no exact type of account that mimics the Roth IRA perfectly. In other words, there isn’t a perfect UK version of the Roth IRA.

Thankfully, government-supported ISAs do provide the same ease of access and growth potential as you’d expect from the Roth.

What are the closest account options to the Roth IRA in the UK?

In the UK, you’ll get an equivalent Roth IRA experience from one of several ISAs, or Individual Savings Accounts. There are four main types of ISA comparable to the Roth on offer, and as with the US counterpart, you won’t have to pay any tax duties on money you save (and, ergo, income from any interest per year).

Similar to the Roth IRA, ISAs generally let you remove money when you wish. The exception to this particular rule can be the Junior ISA, which is built to let young people save money and only withdraw when they reach 18 years of age.

Here are the main types of ISA, comparable to the Roth IRA, you may wish to consider setting up:

Stocks and Shares ISA

As the name hints, the stocks and share ISA allows users to invest money into portfolio options, such as bonds, shares, stocks and ETFs. This type of account, much like other ISAs, is a little more flexible than the Roth IRA in that you don’t have to be of traditional retirement age to withdraw your cash.

Many people choose a stocks and shares ISA when looking for a Roth IRA equivalent as it’s one of the best for growing passive income. Investment choices you make through your portfolio (managed or otherwise) could help you grow more money than you may expect through simple interest.

Cash ISA

The UK cash ISA is the ‘vanilla’ option. This is a fairly traditional account that allows you to generate passive income through yearly interest. This can be fairly competitive for the first year of saving money but may dwindle after time – meaning it’s worth considering a switch of account from tax year to year.

Lifetime ISA

The UK’s lifetime ISA is, much like the Roth IRA, aimed at people who want to retire with as much passive income as possible. This type of account also arrives with government backing, with a bonus offered on top of deposits you put in. This account is a little tighter on the rules than some of the other ISA options out there, however, it’s just as effective at helping you to grow a savings pot long term.

Innovate Finance ISA

This type of ISA isn’t as close to the Roth IRA as the others listed above, as it revolves around you effectively lending money to startups and business developers. You stand to get money back based on interest they generate – it’s a peer-to-peer solution that’s growing fairly popular in the UK and overseas.

Are ISAs better than the Roth IRA?

ISAs and IRAs serve the same purposes in that they help people to put essential money aside while gaining passive income on top. However, there are perks and caveats to either option. What’s more, unless you’re a registered citizen of either the US or UK – your hands are pretty much tied!

ISAs in the UK hold a little more flexibility in some regards, but you’ll still only be able to deposit a specific amount each tax year. You can run several ISAs at once, too, but you can only open one new account in each financial year – April to April.

There’s also some risks to running ISAs that revolve around stocks and/or peer lending. What’s more, the most basic of cash ISAs only generate minimal income through interest rates (which tend to drop hard in year two onwards).

Crucially, it’s worth looking for a UK savings option that speaks to your needs and growth goals. Don’t go looking for a precise copy of the Roth IRA – it simply doesn’t exist!

The Roth IRA vs The Junior ISA

The Junior ISA is very different than the Roth IRA. The Roth IRA is targeted towards retirees, whereas the idea behind a junior ISA account is that your children can learn to save. Your children will only be able to withdraw money when they reach a certain age: they can actually take over the account when they are 16. When they reach 18, the idea is that they have a fantastic savings sum in place to rely on for years to come. I have covered Junior ISAs in much more detail in a separate post, which is worth a read in case this is a topic of interest for you.

Are SIPPs good UK equivalents to the Roth IRA?

A SIPP, or self-invested personal pension, is similar to the Roth IRA in that it’s built for saving towards your retirement. Like the Roth IRA, you can expect to grow your savings outside of tax. In fact, the added advantage to SIPP investment is that you’ll get a 20% tax boost from the government if you commit to it.

SIPPs allow you to invest money in a secure holding that you access once you retire. Similar to the Roth IRA, the main benefit to investing in a SIPP for retirement lies in versatility – you can invest your pension and grow with funds, bonds, stocks – you choose. All of this, too, arrives with interest that’s wholly yours, never taxed.

You can access your SIPP to withdraw money earlier than you’d expect with a Roth IRA. While you need to be 59 years of age to access and withdraw from the US equivalent, at the time of writing, you can take money out of a SIPP when you reach 55. It’s a great option, then, for those of you out there hoping to retire early!

Keep in mind, however, that the age gate will rise on SIPPs as of 2027. This will increase to 57 years of age by 2028. It rises in line with state pension age, in that you can unlock a SIPP ten years before you can legally retire and claim a state pension.

SIPPs, however, can be a little tricky to keep track of if you’re new to investing. These aren’t managed portfolios – meaning you’re on your own when it comes to picking the best stocks and bonds, for example. Of course, do also keep in mind that private pensions elsewhere will likely manage your investments for you – meaning there’s always some give and take.

Do also keep in mind that you will pay tax if you choose to withdraw from a SIPP, with the rate depending on what you’ve made. You can expect the first 25% withdrawn to be tax-free, but after that, you’ll pay income tax. There’s no tax to pay on any movements out of a Roth IRA.

If you’re fairly clued-up on your investments and want to take advantage of growth potential, a UK SIPP is a great choice that compares well with the Roth IRA in the US. There’s less paperwork and precision involved with the latter, but SIPPs give you earlier access and a raft of tax freedoms that are pretty hard to beat.