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re: Opening Roth IRA
Posted on 12/17/18 at 5:24 pm to Wes225
Posted on 12/17/18 at 5:24 pm to Wes225
One feature of a Roth that some overlook is that it's a great place to get your emergency fund started because you can pull out up to what you've put in with no penalty at all.
Say you contribute $500 this year and $600 in 2019, and over that time you earned $100 in interest so you have $1200 at the end of 2019. You can pull out up to $1100 with no penalty at all if you need to. If you had put it in a savings account instead your $100 interest would be subject to income tax. But in a Roth all gains are tax free.
If you go this route be sure to keep whatever portion you consider emergency funds invested very conservatively - you don't want a market turndown to hit right when an emergency happens. When I say "conservatively" I really mean short term bond funds or the like instead of stocks. Once you build up enough to take care of your e-fund needs you can start investing in stocks instead.
Say you contribute $500 this year and $600 in 2019, and over that time you earned $100 in interest so you have $1200 at the end of 2019. You can pull out up to $1100 with no penalty at all if you need to. If you had put it in a savings account instead your $100 interest would be subject to income tax. But in a Roth all gains are tax free.
If you go this route be sure to keep whatever portion you consider emergency funds invested very conservatively - you don't want a market turndown to hit right when an emergency happens. When I say "conservatively" I really mean short term bond funds or the like instead of stocks. Once you build up enough to take care of your e-fund needs you can start investing in stocks instead.
Posted on 12/17/18 at 8:51 pm to foshizzle
Why all the downvotes for using Roth as starter emergency fund? Most young adults I've talked with about starting a Roth are more concerned about having money available for an emergency. I wouldn't recommend pulling cash from Roth unless it's a true emergency. But if that's what's stopping someone from getting started why not keep emergency fund in Roth where they might also be less likely to withdraw it for trivial things short of emergencies.
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