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Would you put emergency fund money in Roth IRA?
Posted on 5/9/21 at 10:46 am
Posted on 5/9/21 at 10:46 am
We are currently in a decent set up financially, and I am trying to figure out the next component. Emergency fund might be a little light as far as immediate cash access, but there is enough if wife and I both lost jobs for 4 months, and 8 months if one lost a job to live the same life. Obviously in that situation we would cut back on expenditures.
I am looking at the next piece of our “emergency fund” that can act as a tax efficient vehicle as needed as well. Private school is just part of our lives at this point, so that’s an expenditure we have accepted. We have a decent 529 for college already funded and I’m looking at bridging the gap if needed and having an emergency education fund. I am also looking at flexibility for taking the chance on stepping out an running our own businesses if needed or buying rental properties if we get to the position where the money isn’t needed anymore to fund school or an outside business interest.
What are your thoughts on funding a Roth IRA as a pseudo emergency fund for those things above? We are at a spot where I know the amounts we need to have go into our 401ks to hit our goals through Roth, Traditional, and matching contributions.
I love the Roth for a number of reasons, “tax diversification” as far as withdrawals when needed in retirement depending on the tax environment we are in, and love the ability to get back contributions if needed for any of the above scenarios. “Worst/Best” case scenario is that we never use the Roths for anything, and they end up being another leg in our retirement scenario that allows us flexibility.
Long story short, what are your thoughts on using a Roth as a funding vehicle for emergency fund/business/school tuition holding spot?
I am looking at the next piece of our “emergency fund” that can act as a tax efficient vehicle as needed as well. Private school is just part of our lives at this point, so that’s an expenditure we have accepted. We have a decent 529 for college already funded and I’m looking at bridging the gap if needed and having an emergency education fund. I am also looking at flexibility for taking the chance on stepping out an running our own businesses if needed or buying rental properties if we get to the position where the money isn’t needed anymore to fund school or an outside business interest.
What are your thoughts on funding a Roth IRA as a pseudo emergency fund for those things above? We are at a spot where I know the amounts we need to have go into our 401ks to hit our goals through Roth, Traditional, and matching contributions.
I love the Roth for a number of reasons, “tax diversification” as far as withdrawals when needed in retirement depending on the tax environment we are in, and love the ability to get back contributions if needed for any of the above scenarios. “Worst/Best” case scenario is that we never use the Roths for anything, and they end up being another leg in our retirement scenario that allows us flexibility.
Long story short, what are your thoughts on using a Roth as a funding vehicle for emergency fund/business/school tuition holding spot?
This post was edited on 5/9/21 at 10:58 am
8
Posted on 5/9/21 at 10:47 am to TigerGrad2011
Point of an emergency fund is to have it immediately available, so no
Posted on 5/9/21 at 10:48 am to Upperdecker
Can you even pull that out without a penalty once you put it in?
Posted on 5/9/21 at 10:52 am to thejudge
Maybe the contributions are not penalized but the gains would be
Posted on 5/9/21 at 10:52 am to thejudge
quote:
Can you even pull that out without a penalty once you put it in?
You can pull what you’ve contributed without any penalties or tax consequences.
Posted on 5/9/21 at 10:52 am to thejudge
quote:
Can you even pull that out without a penalty once you put it in?
The principle, yes. I'd be fine with keeping 4 or so months in actual cash and the rest in a Roth.
What you dont want to happen is lose your job because of bad economic conditions which also probably means your ROTH is down 10-20% so your emergency fund goes from 4 months to two months at the same time you lose your job.
Posted on 5/9/21 at 10:55 am to TigerGrad2011
Considering the fact you have 4 months already set aside, I don’t mind looking at a ROTH as a backup emergency fund too. That’s actually how I used mine early on. Never had to actually touch it, but the comfort of knowing I could allowed me to save more in it than I otherwise would have in a traditional IRA.
I invested mine, but you could always leave it in cash equivalents within the Roth if you need that flexibility.
As to the poster who said an emergency fund has to be available, 2-3 days, at worst, when you have 4 months set aside is pretty accessible, IMO.
I invested mine, but you could always leave it in cash equivalents within the Roth if you need that flexibility.
As to the poster who said an emergency fund has to be available, 2-3 days, at worst, when you have 4 months set aside is pretty accessible, IMO.
Posted on 5/9/21 at 10:56 am to Upperdecker
quote:
Point of an emergency fund is to have it immediately available, so no
I understand that, and the Roth contributions are basically immediately available and wouldn’t need to be touched for a couple months as they are sort of a secondary emergency fund.
My line of thought as well is that I might as well be funding a Roth every year above what I need than a brokerage account or savings account. I’m not necessarily looking at it as a “straight emergency fund”, but as a “flexibility fund” if that makes sense.
This post was edited on 5/9/21 at 10:59 am
Posted on 5/9/21 at 11:18 am to TigerGrad2011
Yes, if it is a true emergency fund, leave it in cash in the Roth. Once you can save an emergency fund outside the Roth, you can invest the cash in the Roth in stocks and funds.
Posted on 5/9/21 at 1:58 pm to TigerGrad2011
I have many illiquid assets.
My Commercial Line of Credit has been my emergency fund, with a Roth as backup. I have never had to dip into the Roth. But now considering withdrawing some to pay down the line of credit.
It's a little hard to do with the performance of Roth vs. Token interest rate on LOC.
My Commercial Line of Credit has been my emergency fund, with a Roth as backup. I have never had to dip into the Roth. But now considering withdrawing some to pay down the line of credit.
It's a little hard to do with the performance of Roth vs. Token interest rate on LOC.
Posted on 5/9/21 at 2:51 pm to TigerGrad2011
Easy answer: No.
Posted on 5/9/21 at 5:45 pm to lynxcat
If the choices are to fund your roth as an emergency or not fund your roth at all, I would say yes. Many folks who have emergency funds, but no roth. In that case, I would say to fund the roth, and if you truly need emergency funds pull them. Yes, you will pay 10% on the growth, but the overall average tax burden can be minimized. For example, if half the account is growth, you would pay 5% on the total if you pulled the whole thing out. If you made a partial withdrawal, you could be selective and manage the tax burden lower.
I can't tell you how many people I have met who have no roth, and also have a savings account for emergency funds. A better option in that case would be to fund the roth into more conservative funds than having a savings account with no roth. Those would be the ones you sell as they likely wouldn't have as much growth. As you get more of a nest egg, you can simply transfer funds over into more aggressive investments. There are no limits on transfers in a year, versus waiting until later to start funding a roth, in which you will hit some limits.
So, I'm saying options in order are:
1.) Fund roth aggressively and don't touch it. Fund emergency elsewhere.
2.) Fund roth and keep some investments conservative for emergency situations.
3.) Fund emergency funds in a different account for emergency purposes, but have no roth.
I can't tell you how many people I have met who have no roth, and also have a savings account for emergency funds. A better option in that case would be to fund the roth into more conservative funds than having a savings account with no roth. Those would be the ones you sell as they likely wouldn't have as much growth. As you get more of a nest egg, you can simply transfer funds over into more aggressive investments. There are no limits on transfers in a year, versus waiting until later to start funding a roth, in which you will hit some limits.
So, I'm saying options in order are:
1.) Fund roth aggressively and don't touch it. Fund emergency elsewhere.
2.) Fund roth and keep some investments conservative for emergency situations.
3.) Fund emergency funds in a different account for emergency purposes, but have no roth.
Posted on 5/10/21 at 9:16 am to TigerGrad2011
I dont think it's a bad idea so long as you keep maybe 1-3 months more liquid, then beyond that in the roth if you want more than that as an emergency fund.
That way, if you do need very quick access to it, you still have at least 1 month put away in something like a high yield savings/money market account you can withdraw that day, then if you need more can work it out on the cash basis in your roth ira.
The only danger to this is early on if the stock market completely tanked, you could actually have less money than you put in, but obviously would correct itself pretty the more cash you continue to put in over time. So that's part of the risk you run there. But I dont hate the idea of making money on at least part of an emergency fund. I live pretty dangerously myself on mine by selling options/cash secured puts to earn money on my wife and I's emergency fund. But that account has well in excess of what we would consider our total emergency fund as well.
That way, if you do need very quick access to it, you still have at least 1 month put away in something like a high yield savings/money market account you can withdraw that day, then if you need more can work it out on the cash basis in your roth ira.
The only danger to this is early on if the stock market completely tanked, you could actually have less money than you put in, but obviously would correct itself pretty the more cash you continue to put in over time. So that's part of the risk you run there. But I dont hate the idea of making money on at least part of an emergency fund. I live pretty dangerously myself on mine by selling options/cash secured puts to earn money on my wife and I's emergency fund. But that account has well in excess of what we would consider our total emergency fund as well.
Posted on 5/10/21 at 9:33 am to thunderbird1100
quote:
So that's part of the risk you run there. But I dont hate the idea of making money on at least part of an emergency fund. I live pretty dangerously myself on mine by selling options/cash secured puts to earn money on my wife and I's emergency fund. But that account has well in excess of what we would consider our total emergency fund as well.
You’re taking the risk into account with your put selling strategy (which so many people do not), plus you have what you consider to be an excess emergency fund, so I agree with your logic.
Posted on 5/10/21 at 5:03 pm to TigerGrad2011
I dont disagree with the roth.
I disagree with the "semantics" as your 2nd emergency fund.
Presently, i have 10 months of my bills in savings/checking (im about to pay cash on a motorcycle and we will pay for a vacation shortly).
My backup emergency fund is my credit.
$40k available in a HELOC.
About $150k available in other credit cards. Cash advances are less than that but still a considerable sum.
Obviously if i need more money, i other resources (cash value life insurance, IRAs and 401ks, etc..).
I guess that my suggestion is to look at available credit as a backup emergency fund before you liquidate tax advantaged accounts which may be tied to a down closing bell.
I disagree with the "semantics" as your 2nd emergency fund.
Presently, i have 10 months of my bills in savings/checking (im about to pay cash on a motorcycle and we will pay for a vacation shortly).
My backup emergency fund is my credit.
$40k available in a HELOC.
About $150k available in other credit cards. Cash advances are less than that but still a considerable sum.
Obviously if i need more money, i other resources (cash value life insurance, IRAs and 401ks, etc..).
I guess that my suggestion is to look at available credit as a backup emergency fund before you liquidate tax advantaged accounts which may be tied to a down closing bell.
Posted on 5/10/21 at 8:23 pm to TigerGrad2011
To be honest, I've blown through emergency funds a couple times. I would have cried if I had to pull from tax advantaged funds.
You need to consider what the emergency could be.
You need to consider what the emergency could be.
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