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You pay taxes BEFORE investing money in a Roth IRA. Therefore, there are no taxes to be paid when withdrawing your contributions from a Roth IRA. Furthermore, you can withdraw any of your contributions to a Roth IRA at any time without penalty. There are restrictions and possible penalities if you withdraw your earnings from the Roth IRA but not if you withdraw the contributions.
Remember also, that a Roth IRA is just a label, it's not an investment itself. One could invest $5500 per year in a money market with a Roth IRA label. Or one can invest $5500 per year in a stock mutual fund with a Roth IRA label. Some investments have risk. Others do not. The benefit of the Roth is that the earnings grow tax-free if you follow the rules on withdrawing the earnings (withdrawing after age 59 1/2 and has been invested for 5+ years).
If one is not already investing in a Roth IRA, there is no reason NOT to put his investments in a Roth IRA except not being able to withdraw ones earnings.
Here are the general rules and guidelines for investing in a Roth IRA and a traditional IRA.
A Roth IRA should NEVER be used for an emergency fund. By definition an emergency fund is meant to be easilly accessible and liquid. Any sort of Retirement Fund is anything but liquid or easily accessible.
Principal contributions are accessible on short notice with no taxes and no penalties.
The main problem I see here is how quickly you can get access to the money. My cousin had to pull money out of a Roth IRA in order to pay the rent for a few months when he was short, and it ended up taking almost a full month. He had to do some fast talking to not get evicted. I don't know if this is typical or if he was doing something wrong, but in my book, money that takes a month to get into your bank account is not a good spot for "emergency" money.
Also, the most likely time to have a major emergency, in general, is in the case of a layoff. The most likely time for a layoff is when the economy sours. And when that happens, the stock market is likely to be down, which makes it the worst possible time to have to pull money out of the IRA for the emergency.
I keep about the same amount as you have indicated ($25k for me is about a year's expenses). I'm doing a laddered CD, where I put $1000 every 3 months into a 5 year CD (so far, I've gotten 2.3% with a 1 time bump up). Over the course of 5 years, that will put $20k into that CD ladder, leaving about $5000 in cash in the bank. In addition, if I have to pull the money out of the CD, I only lose the last 6 months worth of interest as a penalty, not the entire 5 years worth.
Since we are a 2 income family and mostly live off one of the incomes and save the other, $1000 every 3 months would be plenty to cover any shortage we had, assuming only one of us lost a job at a time. But even if you aren't, and it wouldn't, you could still pull all the money out without too much penalty if you had to, and it is much easier to access than a IRA, and better interest than a bank account. For me, it is the "happy medium".
The main problem I see here is how quickly you can get access to the money. My cousin had to pull money out of a Roth IRA in order to pay the rent for a few months when he was short, and it ended up taking almost a full month. He had to do some fast talking to not get evicted. I don't know if this is typical or if he was doing something wrong, but in my book, money that takes a month to get into your bank account is not a good spot for "emergency" money.
Also, the most likely time to have a major emergency, in general, is in the case of a layoff. The most likely time for a layoff is when the economy sours. And when that happens, the stock market is likely to be down, which makes it the worst possible time to have to pull money out of the IRA for the emergency.
I keep about the same amount as you have indicated ($25k for me is about a year's expenses). I'm doing a laddered CD, where I put $1000 every 3 months into a 5 year CD (so far, I've gotten 2.3% with a 1 time bump up). Over the course of 5 years, that will put $20k into that CD ladder, leaving about $5000 in cash in the bank. In addition, if I have to pull the money out of the CD, I only lose the last 6 months worth of interest as a penalty, not the entire 5 years worth.
Since we are a 2 income family and mostly live off one of the incomes and save the other, $1000 every 3 months would be plenty to cover any shortage we had, assuming only one of us lost a job at a time. But even if you aren't, and it wouldn't, you could still pull all the money out without too much penalty if you had to, and it is much easier to access than a IRA, and better interest than a bank account. For me, it is the "happy medium".
If you are holding cash or money market in your Roth it should take no more than a day or two to get the funds.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Quote:
Originally Posted by Lacerta
The main problem I see here is how quickly you can get access to the money. My cousin had to pull money out of a Roth IRA in order to pay the rent for a few months when he was short, and it ended up taking almost a full month. He had to do some fast talking to not get evicted. I don't know if this is typical or if he was doing something wrong, but in my book, money that takes a month to get into your bank account is not a good spot for "emergency" money.
Also, the most likely time to have a major emergency, in general, is in the case of a layoff. The most likely time for a layoff is when the economy sours. And when that happens, the stock market is likely to be down, which makes it the worst possible time to have to pull money out of the IRA for the emergency.
I keep about the same amount as you have indicated ($25k for me is about a year's expenses). I'm doing a laddered CD, where I put $1000 every 3 months into a 5 year CD (so far, I've gotten 2.3% with a 1 time bump up). Over the course of 5 years, that will put $20k into that CD ladder, leaving about $5000 in cash in the bank. In addition, if I have to pull the money out of the CD, I only lose the last 6 months worth of interest as a penalty, not the entire 5 years worth.
Since we are a 2 income family and mostly live off one of the incomes and save the other, $1000 every 3 months would be plenty to cover any shortage we had, assuming only one of us lost a job at a time. But even if you aren't, and it wouldn't, you could still pull all the money out without too much penalty if you had to, and it is much easier to access than a IRA, and better interest than a bank account. For me, it is the "happy medium".
You don't seem to understand that a Roth IRA (or traditional IRA) does not necessarily mean the stock market. I have money in a regular money market account at my credit union. It is earning 1%. I also have money in a Roth IRA money market account at the same credit union earning also 1%. They are almost identical money market accounts except one is considered a regular account and one is considered a Roth IRA account.
I can pull money out of either account today if I go over there. It will not take me any longer to withdraw the money from the Roth IRA money market acct. than the regular money market acct. The only difference between the two accounts is that I can only withdraw the contributions from the Roth IRA money market without tax consequences or penalties (I can withdraw the interest without paying tax and penalties if it has been there 5+ years and I am at least 59 1/2 and a few other exceptions). The other difference (and the real benefit of using the Roth IRA in this case) is that interest in the Roth Money Market account grows tax free if I follow these rules of withdrawal.
You don't seem to understand that a Roth IRA (or traditional IRA) does not necessarily mean the stock market. I have money in a regular money market account at my credit union. It is earning 1%. I also have money in a Roth IRA money market account at the same credit union earning also 1%. They are almost identical money market accounts except one is considered a regular account and one is considered a Roth IRA account.
I knew it wasn't only the stock market, because there are also bonds, but I didn't know you could have money market IRAs at a local credit union, no. Thanks, I learned something new. But I think the majority of people probably set up an IRA or Roth IRA with someone like Vanguard, and I think those managed funds are likely in less easily accessible places, like the stock market. So while your point is valid, we have no way of knowing whether it applies to the OP, and odds are, he's got the Roth in the stock market.
I knew it wasn't only the stock market, because there are also bonds, but I didn't know you could have money market IRAs at a local credit union, no. Thanks, I learned something new. But I think the majority of people probably set up an IRA or Roth IRA with someone like Vanguard, and I think those managed funds are likely in less easily accessible places, like the stock market. So while your point is valid, we have no way of knowing whether it applies to the OP, and odds are, he's got the Roth in the stock market.
No need to try and include outs, vanguard has money market as an option too
Every post on here are talking about what financial advisers mean by emergency money. But the truth is that this is just bridge money that gets someone through a few months of a rough patch such as, losing a job.
True emergency money should have instant fluid availability. An example for emergency money is in case of natural disaster such as, hurricanes, tornados, floods, when excess to banks and ATM's maybe impossible because of large area power outages. The experts say that emergency money should be at least 3 months of normal spending in cash that's kept at home. Even the US government want us to keep a minimum of 2 weeks cash at home.
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Principal contributions are accessible on short notice with no taxes and no penalties.
