The Hidden Roth IRA Risk No One Talks About

What’s not to love about a Roth IRA? If you open and fund one of these accounts, you enjoy tax-free earnings on your retirement investments and tax-free withdrawals as a retiree. And at a time in life when money can be tight, keeping your withdrawals in full without having to pay the IRS is huge.

Additionally, Roth IRAs do not require savers to take required minimum distributions (RMDs). This gives you the option to let your money continue to grow tax-free during your senior years. It’s also easier to pass on some of that money as an inheritance.

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But while Roth IRAs certainly have their share of benefits, there is one major downside that doesn’t get talked about enough. And it’s negative enough that it’s actually the main reason I’m hesitant to open a Roth IRA.

When it’s too easy to cash out before retirement

I am the type of person who hates to waste money or throw it away. I think about paying my credit cards on time every month, for example, because I don’t want to incur late fees. It’s just annoying.

Similarly, the idea of ​​a financial penalty does not sit well with me. So in the context of my traditional 401(k), I’m motivated to leave that money alone until at least age 59 1/2, not just because I want to make sure it’s there for me in retirement, but because I don’t want want to turn over 10% to the IRS as an early withdrawal penalty.

But with a Roth IRA, it’s very easy to make an early withdrawal without penalty. As long as you only tap into the principal portion of your account and not the earnings portion, you can always take a Roth IRA distribution and avoid a penalty.

Many people will tell you that is a good thing. But I think it is not.

Without the threat of a penalty, I could totally see myself tapping into my Roth IRA before retirement. And that defeats the purpose of having one in the first place.

Now you might say, “Well, couldn’t you just exercise some self-control?” And yes, I could definitely try.

But let’s put it this way. Almost daily, I tell myself “You’re not going to stuff your face with junk food today.” And guess what? Most of the time I eat junk food.

In other words, I don’t always win at the self-control game. And for something as important as retirement savings, I want to make sure I’m doing everything in my power to avoid a financial shortfall once I have to stop working.

Be very careful with a Roth IRA

I want to be clear that Roth IRAs have a lot of advantages to offer savers. But if you suspect you could take advantage of the flexibility to withdraw your principal contributions at any time without penalty, then I’d suggest putting at least some of your long-term savings into a traditional retirement plan. You’re less likely to hit your nest egg early if it means losing a chunk of your hard-earned money.