If you were to ask a room full of financial professionals whether it makes sense for the typical worker to save for retirement in a traditional IRA versus a Roth, I have a feeling the Roth would come out victorious. And it's pretty easy to see why.
With a traditional IRA, you get a tax break on your contributions, but the benefits largely end there. With a Roth IRA, investment gains in your account are completely tax-free, and so are withdrawals. And that's huge.
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Once you're retired, not having to worry about the IRS taking a share of your income could alleviate a world of stress. And let's also not forget that Roth IRAs don't force account holders to take required minimum distributions (RMDs) like traditional IRAs do. This gives you a lot more flexibility with your money, as you can let it grow during retirement if you don't need it or pass it down to your heirs as an inheritance.
But despite the many benefits that come with using a Roth IRA, I'm not convinced it's the best retirement savings option. In fact, I'd argue that a traditional IRA makes more sense for savers on a whole for one key reason.
When you lose your motivation to save
Retiring with a giant Roth IRA balance could set you up for an ultra-comfortable retirement. There's just one problem: The very nature of Roth IRAs makes it less likely that you'll actually stay on track with your long-term savings goal.
With a traditional IRA, there's typically a 10% early withdrawal penalty that applies when you remove funds from your account before reaching 59 1/2. With a Roth IRA, you're allowed to withdraw your principal contributions at any time without penalty. As long as you don't touch the gains portion of your balance, you're automatically safe.
That's not a good thing at all.
It might seem nice to be able to use your Roth IRA as an emergency fund of sorts. But it's that line of thinking that could leave you with a serious retirement savings shortfall.
As it is, most Americans lack emergency savings in a big way. A 2023 survey by fintech company SecureSave found that 63% of Americans could not cover an unplanned $500 expense by tapping a savings account. So you can bet that in that situation, someone with a Roth IRA would be quick to raid their nest egg to address an immediate financial need.
But it's not just emergency situations that might inspire an early Roth IRA withdrawal. Frustrated homeowners might tap their Roth accounts to come up with the larger down payments needed to purchase a house today. Strung-out parents might use the money they've set aside for retirement to ship their kids off to camp for part of the summer and take a much-deserved vacation. The possibilities are endless.
But that's why saving for retirement in a Roth IRA has the potential to be a dangerous, and frankly, unproductive strategy. If you're not motivated to keep your retirement savings intact because it's easy to get at that money, you might end up cash-strapped and unhappy later in life. Only, by the time you realize your mistake, it'll be too late.
Know thyself before choosing the right retirement plan
If you're someone who's a serious saver -- the type who started funding a retirement plan right out of college and has never so much as contemplated an early withdrawal -- a Roth IRA may be the right choice. And that way, you can benefit from the many perks discussed.
But if you're someone who grudgingly funds a retirement account because you have to, or because your spouse or neighbor or financial advisor keeps pounding that into your head when you'd rather spend your money here and now, then do yourself a favor and don't put your savings into a Roth. Instead, give up those future benefits if a traditional IRA keeps your savings intact because you can't stand the idea of being penalized to access money that's yours.
At the end of the day, a Roth IRA is only a valuable retirement savings tool if you actually reserve the money for retirement. Sticking with a traditional IRA could make that more likely to happen.
