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re: Looking for some realistic advice
Posted on 1/21/11 at 2:12 pm to TigerDeBaiter
Posted on 1/21/11 at 2:12 pm to TigerDeBaiter
quote:
Over five years one contributes $20,000; are you allowed to take all that out in the 6th year and not pay any taxes on it, and just leave the growth in the account?
Yes, that's correct.
You're also right that it is better to leave the money in there if you can. You don't want to withdraw from either account but if you have to there's no difference other than some paperwork. You'll have to report a Roth withdrawal on your tax return but only to show that you didn't take out any investment gains along with it so that the IRS doesn't send you a bill.
But that's just paperwork. If the choice is between a Roth and savings account, clearly the Roth is better because gains are not taxed.
Regarding getting "emergency funds" some would consider a 401(k) but I'd advise against it for money you might need back later in a hurry. It's true that you can borrow money (not withdraw) from the account if you need it, and some people say this is just borrowing from yourself so who cares?
The problem is that you have to qualify for the loan even though you're borrowing from yourself, just like applying for a loan at the bank - if you need money in a hurry you might not be in a position to qualify (say if you lost your job). Not only that, but you repay the loan in after-tax funds rather than pre-tax. Not a good idea. 401(k)'s can be great for stashing money you do not expect to touch until 59 1/2, especially if you get a company match, but they are not for emergency funds.
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