Why a Roth IRA Could Be Your Best Retirement Move -- or Your Biggest Mistake

If you want to avoid struggling financially during your senior years, saving for retirement really isn't optional. Social Security might pay you a decent monthly benefit. But if you're an average earner, those monthly checks will only replace about 40% of your pre-retirement wages.

To live comfortably, retirees typically need to replace a good 70% to 80% of their former wages. So your retirement savings may need to make up the difference.

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But a big part of saving well for retirement is finding the right home for your money. That's because the type of retirement account you choose could have a major impact on how much flexibility you have.

Sometimes, though, that flexibility can be a bad thing. And that's why you need to proceed with caution when saving for retirement in a Roth IRA.

The benefits of a Roth IRA

There are plenty of good reasons to choose a Roth IRA for your retirement nest egg. First, these accounts allow your money to grow tax-free, and withdrawals are tax-free as well.

Let's say you contribute a total of $200,000 to a Roth IRA in your lifetime. If your balance grows to $1.2 million through smart investing and compounding, you get to walk away with a $1 million gain without the IRS getting a penny of it.

Roth IRAs also do not force savers to take required minimum distributions (RMDs). This gives you the option to leave your nest alone if you don't need to take withdrawals every year. Over time, those untouched funds could grow even more, even once you're no longer working.

And if you're hoping to leave a generous inheritance, there's perhaps no better account to do that in than a Roth IRA. That's because your heirs get the same tax-free withdrawal treatment (provided you held your account for at least five years first).

The hidden danger of saving in a Roth IRA

Roth IRAs are a great savings tool because of the flexibility they offer. But in a way, they also offer too much flexibility. And that could be your downfall.

Because you don't get a tax break on the money you put into a Roth IRA, you're able to access your principal contributions at any time without a penalty. But that's not automatically a good thing.

Since it's easy to tap a Roth IRA ahead of retirement, you run the risk of actually doing that. Repeatedly. The result? Less money for your senior years.

Remember, funds you remove from a Roth IRA lose out on tax-free growth. Now, imagine you take a $2,000 withdrawal at age 30 to pay for a car repair.

It might seem innocent. But if you're planning to retire at 65 and your Roth IRA generates a yearly 8% return, which is a bit below the stock market's average, pulling $2,000 out at age 30 could leave you with an almost $30,000 shortfall 35 years later.

It's important to have restraint

A Roth IRA could be your ticket to a solid nest egg for retirement. The combination of tax-free gains, tax-free withdrawals, and no forced withdrawals is hard to beat.

But for your Roth IRA to serve you well in retirement, you need to leave that money untouched during your working years. That means resisting the urge to tap your savings when money gets tight. It also means maintaining a robust cash emergency fund so you have other options for accessing money in a pinch.

If you trust yourself to earmark your Roth IRA for retirement and retirement only, then it could be a powerful savings tool worth using. If you don't trust yourself not to take withdrawals along the way, then you may be better off keeping your nest egg in a traditional IRA that imposes a 10% early withdrawal penalty. That way, you may be more motivated to keep that money off limits until retirement arrives.

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