Here's One Good Reason to Choose a Roth IRA Over a Traditional IRA

If you've decided you're ready to start saving for retirement, congrats. You're making a savvy decision that could set you up for a more financially stable future.

You have choices when it comes to finding a home for your savings. You could open a traditional IRA and enjoy an upfront tax break on your contributions. Putting $3,000 into a traditional IRA, for example, will mean not being taxed on $3,000 of income.

Roth IRAs don't offer that same benefit. However, Roth IRAs allow you to enjoy tax-free investment gains and tax-free withdrawals in retirement. With a traditional IRA, you'll pay taxes on your investment gains when you take withdrawals, which are taxed in retirement.

But while tax-free investment gains and withdrawals are a huge perk of saving for retirement in a Roth IRA, there's another lesser-known benefit you should be aware of. And it may push you to choose a Roth IRA for your long-term savings.

When you get more flexibility with your money

Because the IRS gives you a tax break on the money you put into a traditional IRA, it imposes strict rules about when you can touch those funds. If you take a distribution from a traditional IRA prior to age 59 1/2, you'll face an early withdrawal penalty of 10% of the sum you remove.

There are limited exceptions to this rule, such as that you're allowed to withdraw up to $10,000 penalty-free to purchase a home for the first time. But generally, you can't just tap a traditional IRA early without consequences.

This means that if you run into an emergency expense, like a home or car repair, and you need $5,000 to address it, you can't just raid your traditional IRA. If you do, you'll lose $500 off the bat.

Roth IRAs don't impose that same penalty, provided you're only touching the principal portion of your balance and not the gains portion. The reason is that you don't get a tax break on your Roth IRA contributions. Because of that, if you need to remove $5,000 from a Roth IRA before age 59 1/2 to deal with an emergency expense, you won't automatically lose $500 as long as you put at least $5,000 into your account out of your own money.

So let's say that over a 10-year period, you contribute $3,000 a year to your Roth IRA, or $30,000 total. Through savvy investments, you might end up with $50,000. As long as you don't touch the $20,000 gains portion of your account before age 59 1/2, you shouldn't have to worry about penalties.

To put it another way, a Roth IRA can serve as a backup emergency fund so you have money you can tap in a pinch. Seeing as how 63% of Americans don't have enough emergency savings to cover an unplanned $500 expense, as per a recent SecureSave survey, having your retirement funds in a Roth might really bail you out of a jam.

Don't fall back on a Roth IRA for emergencies

The fact that you can use a Roth IRA for emergency expenses might drive you to choose one of these accounts over a traditional IRA. But remember, the more money you remove from your retirement savings, the less of a nest egg you'll have once your career comes to an end.

So while you can tap a Roth IRA early to cope with emergency expenses, you really shouldn't go that route if you can help it. A much better bet is to put money into a regular savings account that's earmarked for emergency expenses.

In fact, it's a good idea to build a strong enough emergency fund to cover a full three months of essential bills. This way, if you were to lose your job, you'd have the money on hand to pay your expenses in the absence of a paycheck.

A three-month emergency fund also puts you in a good position to cover even an enormously expensive home or car repair. So if you're going to save for retirement in a Roth IRA, also try your best to build up three months' worth of savings so you don't have to tap your nest egg prematurely.