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Can anyone share their thoughts on this? As I understand it, you can withdraw CONTRIBUTIONS to a Roth IRA without penalty before the age of 59. You will be penalized & taxed if you withdraw any investment earnings, however your contributions can be taken without penalty or tax at any time.
Assuming this is correct, to me this would make a Roth IRA a really attractive option for an emergency fund. It gives you the chance to expose your emergency fund to the market and potentially make more than you would in a savings account. And if you don't need the money, then you're building up a Roth, which is a good thing obviously.
The limitations would relate to the maximum annual contribution, but if you have a spouse you can both open one and get $10,000 in there.
You are correct, you can withdraw contributions from a Roth without penalty.
I don't think it's the best option for an emergency fund, though, for a few reasons. Main reason is that when emergencies happen you generally need money fast, and it may take a few days to get a distribution check from your IRA account.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Well, I think it depends on what you define as an emergency. Some people define emergency as needing their HVAC or roof being replaced, while others would consider that a home maintenance expense that they've saved up for. Others would describe an emergency only as something that is life-changing, such as losing a job and not being able to fnd one for a long time or a catastrophic illness.
If you consider an emergency the former, I would not use the Roth in that way. If it's for the latter, a true life-changing emergency, I don't think it's a bad idea.
I mean, there is definitely a hierarchy of emergencies, both emotionally and financially. You should have money readily available for low amounts and low-emotional ones. But no emergency fund is going to cover EVERY emergency for a very long period of time - think something like life-threatening illnesses or sicknesses that keep you unemployed.
I think keeping a two-tiered emergency fund is a good idea. Low-level emergencies are likely to happen to a large number of people. Higher-order ones affect a smaller number of people. Having a few months' worth of emergency in an accessible account to cover more common emergencies with the balance to come from your Roth IRA if there's an emergency of the highest order isn't that bad of an idea.
To answer the original poster. If you currently do not have a Roth IRA, I would set up one and use it as an emergency fund if you have nothing else. A Roth IRA is a must, so if you have no current savings, this is a good start. The other posters make good points though, the money isn't as liquid as a checking or savings account.
I have my investment accounts tied to a checking account. I can move money from my IRA, ROTH, brokerage, etc accounts to the checking account in 10 seconds online. The limitation might be the need to trade after hours if you don't have a large cash balance.
One option might be to open a ROTH brokerage account and keep a portion in a money market fund. Invest the rest.
I think a Roth should be fine as an emergency account, provided you are young as the inputs are fairly low vs what one might consider an emergency, ie can only put in $5k a year but need $8k in an emergency. You'd need 2 full years of input you have that much
Also if you are going to use your Roth as an emergency fund, it cannot be your primary retirement account. You should expect to have to tap your emergency fund well before you hit retirement age, and you need years of compounded growth to prepare for retirement. That means you can't take money out of your retirement accounts before you are retired basically for any purpose.
If that's all ok, and you need the money faster than you can transfer between accounts, you could just put it on your credit cards until you have the Roth funds transferred to a liquid account.
As for my situation, I currently have a Roth and I'm putting $300/month into it. In addition, I'm contributing to my 401k at work up to the full match for the employer, but nothing beyond that. I have 6 months of emergency fund money, but most of it is invested in an index fund. I'm kicking myself now as I know that is not where it belongs and I'm going to pay tax if/when I do need it. It's been there for probably 5+ years now however and I haven't had to touch it.
I have some company stock that I'm considering cashing out that would net me $10k if the stock price goes up another few percent. So my thinking was to take that, open a Roth in my wife's name and throw $5k into that, take another few thousand and put it to the Roth I have (which would put me at the $5k match for the year), and then put the rest into savings. Then, I would take the $300 I'm currently contributing to the Roth each month and either have it go straight to savings or increase my 401k contribution.
Anyway, interesting concept. Not sure how many people know that you can take that $ you contribute to a Roth without panel. Crazy not to have a Roth...
one of the reasons i dis-like roths is the ease that money can be hit.
to me retirement money should be sacred and off limits. the harder to hit the better in my book.
why?
because life is like fighting a war. you need money for now,money for emergencies,money for later,money for retirement ,etc ,etc.
you have all these different fronts going on at the same time.
while pulling from one front my shore up another front you may win a battle but you will eventually lose the war.
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