Author Topic: Keep some emergency fund in Roth IRA?  (Read 4105 times)

bikebum

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: Nor Cal
Keep some emergency fund in Roth IRA?
« on: April 04, 2014, 05:55:19 PM »
Hey Mustachians!

I am considering moving some money from my $10K emergency fund to a taxable account and using my existing Roth IRA as a back-up emergency fund. I'm 28, here's my situation:

Assets
457(b): $21K
Roth IRA: $8K
T-IRA: $2K
Savings Account: $10K (This is my existing emergency fund)
Home: $140K (I usually don't count this as an asset but wanted to show my complete situation)
CalPERS: $15K (I don't usually count this either as it is for my retirement pension)

Debts
Mortgage: $109K @ 3.375%

Income
Gross: $71K (with 5% raises each year for next 5 years)

Spending
$18K per year
Could be reduced to $12K per year, maybe less, in an emergency

So I'm thinking of putting $7K from the emergency fund into a taxable account. Then I'll have $3K in the savings account for emergencies, and can use my Roth IRA as a back-up emergency fund. Another thing to consider is if I lose my job I will have full access to my 457(b). I have health insurance through work. I realize this is a personal decision, but does anyone see a reason why I should not do this? Other advice is welcome too. Thanks!
« Last Edit: April 04, 2014, 08:07:36 PM by bikebum »

inthenavy

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Keep some emergency fund in Roth IRA?
« Reply #1 on: April 04, 2014, 08:24:15 PM »
Well, I'm a newbie here but that's what my husband and I just decided to do. I hate letting our employees stand idle in a savings account.   We agreed on 4k as our cash E fund, but we have a baby.  We also have liability only  car insurance, so we need to be able to buy a cheap car if necessary.  However, we are a military family so we rent and health care is free, so those are expenses we dont have to account for right now.

I read this to make that decision: http://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

I'm interested to hear what others have to say!



bikebum

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: Nor Cal
Re: Keep some emergency fund in Roth IRA?
« Reply #2 on: April 04, 2014, 08:52:15 PM »
Thanks, the link made me realize something. I am currently maxing out all my tax-advantaged options. If I have an emergency and take some money from the Roth IRA, I cannot replenish it later. So I will have lost the opportunity to keep that money in a tax-advantaged account.

It does seem less that optimal to leave $10K sitting in a savings account though. Maybe I should just reduce it, to say $6K.

stevesteve

  • Guest
Re: Keep some emergency fund in Roth IRA?
« Reply #3 on: April 04, 2014, 10:29:40 PM »
Thanks, the link made me realize something. I am currently maxing out all my tax-advantaged options. If I have an emergency and take some money from the Roth IRA, I cannot replenish it later. So I will have lost the opportunity to keep that money in a tax-advantaged account.

Bingo.  When you're doing your calculations you're not discounting for risk.  I don't know your inherent discount rate but it should take into account the fact that you could 1) be forced to sell low and 2) lose tax advantage if something goes wrong.  It's a bit like--but not as bad as--being over leveraged.

shelfins

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Keep some emergency fund in Roth IRA?
« Reply #4 on: April 04, 2014, 11:11:11 PM »
Why not put your emergency fund in a taxable Vanguard account? That's what I do. You might want to keep a bit more money in there to account for the fact that you might need the money when the stock market is down, but if you put $12-15k in a taxable account, you can sleep easy knowing you'll have enough to get you through 6-9 months without a job, no problem (especially considering that you can always pull from 457(b) if you really needed to. Yes, you'll have to pay taxes on the dividends, but you'll still come out way ahead than if you just leave it in a checking account.

bikebum

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: Nor Cal
Re: Keep some emergency fund in Roth IRA?
« Reply #5 on: April 05, 2014, 12:44:38 AM »
Why not put your emergency fund in a taxable Vanguard account? That's what I do. You might want to keep a bit more money in there to account for the fact that you might need the money when the stock market is down, but if you put $12-15k in a taxable account, you can sleep easy knowing you'll have enough to get you through 6-9 months without a job, no problem (especially considering that you can always pull from 457(b) if you really needed to. Yes, you'll have to pay taxes on the dividends, but you'll still come out way ahead than if you just leave it in a checking account.

I am planning on starting a taxable account anyway. So is your emergency fund in stocks, not a money market fund?

Anyone else have thoughts on using part of a taxable account as an emergency fund?

shelfins

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Keep some emergency fund in Roth IRA?
« Reply #6 on: April 06, 2014, 11:19:53 PM »
Yes, a blend of stocks and bonds, but mostly stocks. As long as you have enough in there that you'll have enough to get by even if you need to pull out your emergency funds in a bear market, you should be fine.

TomTX

  • Magnum Stache
  • ******
  • Posts: 4095
  • Location: Texas
Re: Keep some emergency fund in Roth IRA?
« Reply #7 on: April 07, 2014, 05:42:00 AM »
Yes, a blend of stocks and bonds, but mostly stocks. As long as you have enough in there that you'll have enough to get by even if you need to pull out your emergency funds in a bear market, you should be fine.

Increased risk short-term, decreased risk long-term.

My solution was different - I have about half my emergency fund in an I-bond. Return rate is much better than a money market (currently I am getting ~2.6%) - and I can cash it whenever I want, now that I am past the initial penalty period.

Edit: Hm. Looks like an I-bond purchased today is 1.38% return (which will adjust with inflation.) The inflation adjustment is (to me) the biggest selling point of the I-bond. If interest rates go up, my return goes up - unlike traditional bonds or CDs, where you are locked in.
« Last Edit: April 07, 2014, 06:02:37 AM by TomTX »