Emergency fund in Roth IRA

Your emergency fund should be boring. Your Roth should be for retirement. That said, IF you find yourself in a bind you can use the principal in the Roth. Horrible idea, but yes you can. It's also a horrible idea to put your emergency funds in the stock market.

Your emergency funds cover you in the event of job loss, disability, and to cover large, unexpected expenses (such as a flood). Which scenario do you want to be caught in that you have to raid your retirement should the market be down 20%?

I love this board...

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Your emergency funds cover you in the event of job loss, disability, and to cover large, unexpected expenses (such as a flood). Which scenario do you want to be caught in that you have to raid your retirement should the market be down 20%?

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For people just starting out I don't think it's an issue if they only touch it in a legit emergency. It's getting tough for young professionals to just build a legit fund right away.

Thanks for the replies. Like I said it's been mentioned in some other threads so I was wondering the situations that one should do this.

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Therefore, I'd rather put emergency funds in the ROTH now, and in the future as my financial situation improves, THEN you start converting the funds inside the ROTH to riskier assets such as stock holdings.

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Solid point. Wasn't how the question was posed, but thumbs up.

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For people just starting out I don't think it's an issue if they only touch it in a legit emergency. It's getting tough for young professionals to just build a legit fund right away.

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This, however, is riddled with excuses. 1) It's always been tough... 2) If you don't have an emergency fund, everything that happens is a legit emergency.

The is my approach and it's working for my situation.

I never keep more than $20K sitting in my emergency fund. If I have $20K in my emergency fund, I funnel the rest towards maxing out my ROTH. If something happens to my job, I think I would be able to find another within 6 months. With expense shedding, unemployment, and/or likely finding part time work I could likely stretch my emergency fund to cover well past a year. At the very worst case, I can tap into my Roth IRA.

Capital One 360 Money Market is earning just over 1% I believe. That could be one of the easiest things you could possibly do right now.

There's nothing at all wrong with using your Roth as your emergency fund. Just make sure that the portion you regard as "emergency money" is conservatively invested.

Now, if you can do more than max your Roth then you have to use another account (like a savings or brokerage) but if you haven't maxed the Roth go ahead and do it. That is always better than putting it in savings and *not* maxing the Roth.

I think it depends significantly on what you mean by your "emergency fund". I have very little fear of losing my job, so my emergency fund is quite small, because it's solely to cover unexpected/large expenses (i.e. washer and dryer go out, insurance deductible, etc). It generally fluctuates between $2k and $5k, depending on how recently I've needed to dip in. Because money is not infrequently going in and out, I keep that money in an Ally savings account. And I would argue that this kind of cushion is crucial, otherwise you end up falling down the revolving debt rabbit hole.

With that said...

Unless you consider yourself at serious risk of losing employment with little notice, I think it's a terrible idea to forgo maxing your ROTH in order to squirrel away a larger "emergency fund". If you can fully fund both, great. But assuming you have a few thousand liquid for those unexpected expenses, I see no reason not to put the rest of your hypothetical emergency fund in your ROTH. Again, assuming a paradigm in which you simply can't afford both.