If material is too hard, the intrinsically motivated child just won't read it all. Does this mean that the child shouldn't be allowed to bump up against the ceiling of his/her ability? I'd say no. That's where learning occurs (and interest is piqued)!
Exactly this.
This philosophy of "don't let them read anything with a scary big word" seems to me to assume that children's interest in reading is extremely fragile and terribly easy to destroy. I suppose it can be at times, but I think children who WANT to read a book should not be discouraged, for God's sake. IIRC, when Harry Potter first broke out and got big, there was a lot of excited crowing about how it got a ton of kids into reading who had never been into it before--even reluctant readers or those who were rather low ability for grade. Some of those kids finally "got" reading for pleasure due to HP. Heaven forbid that some well-meaning adult should have forbidden them access.