Roth IRAs are often hailed as the best retirement savings tool out there. And it's easy to see why.
With a Roth IRA, your money gets to grow completely tax-free. This means that if you contribute $100,000 to a Roth IRA and it grows into $1 million, you get to walk away with $900,000 in gains without the IRS getting a piece of it.
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Roth IRAs also give you tax-free withdrawals in retirement. And at that stage of life, not having to share some of that income with the IRS is huge.
Finally, Roth IRAs do not force savers to take required minimum distributions. This gives you more freedom with your money.
Now one big reason some people tend to avoid Roth IRAs is that they want the immediate tax break that comes with funding a traditional retirement account. And if you're a higher earner in a higher tax bracket, that makes sense.
But there's another big reason you may want to avoid saving in a Roth IRA. And it has nothing to do with taxes.
It's a matter of behavioral risk
If you tap a traditional IRA before age 59 and 1/2, you'll generally face a 10% early withdrawal penalty unless you qualify for an exception (such as taking a limited withdrawal to buy a first-time home). But with a Roth IRA, you don't have to worry about early withdrawal penalties as long as you only touch your plan's principal contributions, and not the gains portion.
With a traditional IRA, your money goes in tax-free. But with a Roth IRA, there's no tax break on your contributions. And so the IRS lets you withdraw your principal contributions without sticking you with a penalty.
In theory, that might sound like a good thing. In practice, it can be a very dangerous thing.
It's one thing to tap your Roth IRA early to address a true financial emergency. But if you know you can access your contributions at any time, you may be tempted to do so for non-emergency purposes, like to improve your home or take a vacation.
Granted, you could also raid a traditional IRA early and just take the 10% penalty. But that penalty tends to serve as a huge barrier to taking early withdrawals. Since that's not the case with a Roth IRA, the concern is that you might repeatedly tap your savings early, leading to a shortfall once your career comes to an end.
Be honest with yourself
If you're a naturally strong saver who's serious about building a nest egg, you may not be the type to tap your Roth IRA for non-retirement purposes. But you need to be honest with yourself about whether you'll truly have the willpower to avoid touching the money in your Roth IRA ahead of retirement before funding one of these accounts.
If you think you'll need more motivation to keep your retirement savings off limits, then a traditional IRA could be a better choice. And while you'll give up certain benefits that come with a Roth IRA, a traditional IRA could lead to much more savings overall.
