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But while there are plenty of perks that Roth IRAs have to offer, you don’t want to open one for the wrong reason. And if you offer a Roth IRA because it’s easy to pull money out of that account ahead of retirement, then you could end up doing yourself a major disservice.
The downside of too much flexibility
In addition to tax-free investment gains and withdrawals and the absence of required minimum distributions, another benefit that Roth IRAs have to offer is that you can withdraw your principal contributions at any time without penalty. The logic is that since you don’t get a tax break on the money you put in, you’re not penalized if you pull money out ahead of retirement. With other retirement plans, you face penalties if you remote funds prior to age 59 ½.
Now to be clear, if you touch your Roth IRA gains early, penalties could ensue. Say you put $10,000 of your own money into an IRA and over a few years, that balance grows to $15,000 thanks to your investments. If you decide to take an early withdrawal from that account, that first $10,000 is fair game, and you won’t be penalized for accessing it. It’s when you try to withdraw that $5,000 in gains that penalties could come into play.
At first, having that flexibility may seem nice — so nice that you’re tempted to open a Roth IRA for that reason alone. But remember, the money in your retirement plan is supposed to be earmarked for — wait for it — retirement. If you withdraw funds early, you’ll have less money on hand during your senior years, when you’re apt to need it the most.