Comments on: Using a Roth IRA as an emergency fund?

By: Bob

Bob — Sun, 08 Nov 2009 03:42:35 +0000

I am planning on retiring next year, and I want to do a roll over,,I have not paid any taxes on my money, but I want to roll it over instead of paying a big tax on it all at once, then I want to with draw about 2,000 a month to help with the morgage,,do I pay the taxes each month when I with draw or at the end of the year? Do I have to pay a fee to with draw each month? With all that the last year has showed us with investments and banks ,,I am a little worry about my money.
Bob ( fellow Christian )

By: bob

bob — Tue, 30 Jun 2009 22:17:13 +0000

@Patrick
just for the sake of clarification, it is just your contributions. I think you caught that Pochax said this, but I just wanted to make sure it is still clear…

By: Patrick

Patrick — Tue, 30 Jun 2009 20:43:26 +0000

You can withdrawal it all ??

Well what the heck, why don’t we make all our savings accounts a Roth? That sounds pretty swell, you still get all the investment options, and tax free withdrawals anytime you want.

By: Nick

Nick — Tue, 30 Jun 2009 16:29:58 +0000

It is a terrible idea to withdraw contributions from your Roth IRA. Unless you are in dire need, you are hurting yourself in the long run because that money won’t continue to grow for your retirement. Do NOT think of your Roth as an emergency fund!

By: Pochax

Pochax — Tue, 30 Jun 2009 15:32:15 +0000

@Patrick:
1) you can withdraw ALL contributions (but not gains)..not just in the last tax year. If you have contributed $50k over 15 years and the Roth is now worth $100k (= $50k gains), you can withdaw up to $50k tax- and penalty-free. You will have to be careful and fill out all the correct forms during tax filing.

the problem with looking into it reverse:
it depends on what your definition of emergency is. Many people use emergency funds as a basket to dip into for the occasional overspending from their written budget. routinely doing this with a Roth can have major repercussions on future gains. i am not saying NEVER to use the Roth as an emergency fund, just to limit it to TRUE emergencies (catastrophic unexpected events) and still try to set up a more liquid emergency fund in a savings account.

By: Patrick

Patrick — Tue, 30 Jun 2009 14:39:57 +0000

Sounds pretty interesting, but I have some serious questions.

1) What money can you withdrawal penelty free? Is it any money you put in during that calendar year? Or any money you put in within the past 12 months?

Obviously if it’s by the calendar year, and you have an emergency in January, then you have a problem.

2) After 12 months, or after the calendar year, depending on question 1, your emergency fund, BECOMES your retirement savings, becuase you can no longer tap into it tax free. So whatever your emergency fund needs to be, minus the annual amount you put into your roth, needs to be stored away somewhere else.

Other than that, I think it’s a pretty good idea.

To Pochax, I think you could look at it in reverse. Where you would put $5,000 aside for emergency fund, you could put it into the roth and if you don’t have an emergency then great, you just made the compounded interest!

By: Rajeev Singh

Rajeev Singh — Tue, 30 Jun 2009 14:09:38 +0000

“Emergency Fund” is one of the most important funds that you need to set up from your savings,..with job security already being a thing of past it always helps to have the fund to take care of your needs for 6-8 months.

By: Pochax

Pochax — Tue, 30 Jun 2009 13:43:45 +0000

i think this “access” to funds in a Roth is a “nice to have” but one should not plan their Emergency Fund in this way. however, it does seem to help when you have a limited amount of funds to work with. I agree the ideal is to have the 3-6month E-Fund in a liquid savings account APART from your Roth. one thing you do not realize is the LOST gains you experience when you remove those contributions from the Roth. if you are young, you are potentially losing compounded 7-10% annualized gains if you have a moderately aggressive asset allocation which means your $5000 you just removed to deal with an “emergency” really costed you $20k-50k in TAX-FREE money in retirement. Thus, if one is going to pull out Roth money, make sure it is a REAL emergency and not just a “i need to have that new car” impulse buy.

By: Paying Off Student Loan Debt Early | Prime Time Money

Paying Off Student Loan Debt Early | Prime Time Money — Mon, 29 Jun 2009 23:14:59 +0000

[...] Roth IRA as an Emergency Fund [...]

By: Paul @ FiscalGeek

Paul @ FiscalGeek — Mon, 29 Jun 2009 23:14:58 +0000

Very interesting idea, but I worry for myself of not having the discipline to really seperate Emergency from Retirement. For me compartmentalization makes good sense.