It’s important to save for retirement, because trying to live on Social Security alone might prove disastrous. As of early this year, the average senior on Social Security was collecting just $1,827 a month.

If you’re decades away from retirement, you can bet that the average monthly benefit will increase over time due to inflation. But even so, generally speaking, Social Security will only replace about 40% of your pre-retirement income. And retirees tend to need around twice that much income to cover all of their bills — hence the need to save.

When it comes to building a retirement nest egg, there are different savings accounts you can look at. And you’ll often hear that putting money into an IRA account is a great choice.

A traditional IRA allows you to snag a tax break on the money you put in. So if you contribute $3,000 to an IRA this year, that’s $3,000 of income the IRS won’t be able to tax you on. Traditional IRAs can also be invested for added growth, but investment gains in your account will be tax-deferred. That means you won’t be taxed year after year, but rather, when you take withdrawals during retirement.

But while IRAs may be loaded with tax benefits, keeping all of your retirement savings in one actually isn’t a great idea. That’s because you might run into an issue if you decide to retire early.

You need options

Some people struggle to retire on time and end up having to extend their careers. But if you save diligently and consistently, you might land in a position where you’re able to retire in your 50s.

But having all of your money tied up in a traditional IRA could be problematic in that scenario. That’s because IRAs penalize you for taking withdrawals prior to age 59½. And the penalty you’ll face is 10% of the sum you withdraw.

So, let’s say you have enough savings by age 57 to retire comfortably. If you withdraw $40,000 the year you turn 57 to cover your expenses, you’ll be penalized $4,000 simply for accessing your money early. That’s not a penalty you want.

That’s why you may not want to keep all of your retirement savings in an IRA. Rather, you may want to keep a portion in a taxable brokerage account you invest in. A regular brokerage account won’t give you any tax benefits, but it will give you more flexibility in that you can access your money penalty-free whenever you want.

Don’t let your plans get thrown off-course

Retiring early has many benefits, like being able to pursue hobbies and travel at a time when you’re still in good physical shape. But the last thing you want is to not be able to retire early simply because you can’t access your money penalty-free. So in the course of saving for retirement, make it a point to spread your assets around a bit, even if it means giving up some tax breaks along the way.

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