Author Topic: Roth ira contribution and emergency fund  (Read 871 times)

Calimerostache

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Roth ira contribution and emergency fund
« on: June 08, 2019, 11:11:42 AM »
Hello,

Don't know if this topic has been covered somewhere else in the forum.
I'm trying to size my cash emergency funds to around 1 year of expenses.
Until today I was only considering my checking and saving account to cover 1 year of expense (pretty conservative guy)

But i feel like this is strapping a lot of cash in low return accounts.

So i was thinking on considering my past Roth Ira contribution as available cash for my emergency funds (since I understand that I can withdraw them penalty free at any time)

Does any one do this? Am I just stupid for not having thought about that before?
Any risk with this approach?

Curious on what the rest of the community does

Thanks

nereo

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Re: Roth ira contribution and emergency fund
« Reply #1 on: June 08, 2019, 03:20:10 PM »
It's certainly one strategy you can take towards an e-fund. 
The 'risk' you run is that should you take out contributions for a real emergency you have just 60 days to replace those funds or lose that tax-free growth (and future tax-free distribution) forever.  But its certainly a better option than carrying a large balance on a high-interest credit card.

To illustrate the point, if you are in your 20s and take out $5k in contributions to pay for some expense that money could have easily become $70k in inflation-adjusted, tax free dollars in your 60s.

MDM

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Re: Roth ira contribution and emergency fund
« Reply #2 on: June 08, 2019, 03:40:46 PM »
Curious on what the rest of the community does
See Roth IRA as an emergency fund - Bogleheads for some thoughts.

terran

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Re: Roth ira contribution and emergency fund
« Reply #3 on: June 08, 2019, 09:25:59 PM »
I would have linked to the Bogleheads Wiki MDM linked to.

Remember that an account and an investment is not the same thing. You hold an investment in an account. Accounts can have different tax characteristics, but other than that, they don't have different returns. Given that, if you've decided that one year of expenses is the appropriate amount for you to have in an emergency fund (in the sense of liquid, unlikely to lose value holdings) then considering your Roth to be part of your emergency fund is fine, but that portion of your Roth should not then be invested in equities. Whether or not you need a one year emergency fund is another question, but that's independent of whether part of your emergency fund should be in a Roth account. That's a question of how much you should hold in "cash" (or other stable value investments) and how much should be invested in equities.

All that said, if you can't currently afford to max out all of your available tax advantaged accounts and build/hold the emergency fund to the desired level, then I think considering part of the Roth to be your emergency fund (and investing it in stable value investments) and putting the taxable emergency fund into tax advantaged accounts is a great idea.

Calimerostache

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Re: Roth ira contribution and emergency fund
« Reply #4 on: June 08, 2019, 11:43:45 PM »
Thanks for the answers.
I will make sure to invest in a low risk fund in my Roth .

ontheway2

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Re: Roth ira contribution and emergency fund
« Reply #5 on: June 10, 2019, 08:52:00 AM »
I do this. I am building my emergency fund back up after divorce but want to continue maxing my available retirement accounts since I can never go back and put the money in. Because of this, I am leaving some contributions in the money market account until I am comfortable with my savings account balance. I will not do it long term, but am ok with it for now since the money is in there and can be invested in the future. Odds are I will not have to pull it out since it is not the sole emergency fund though.

Have you considered only having 1 year expenses less unemployment (which won't last the full year)? In the event of a job loss, it will still get you through the full one year. For use beyond job loss, it seems it would be sufficient for most things

Edit: I also have my cash in multiple accounts to get the best returns without requirements. A local CU is offering over 5% on balances under $2500, so I have 2.5k there, most of the rest at Ally earning ~2.2%, minimal earning 0.15, etc.
« Last Edit: June 10, 2019, 08:55:00 AM by ontheway2 »

nereo

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Re: Roth ira contribution and emergency fund
« Reply #6 on: June 10, 2019, 11:26:18 AM »
Thanks for the answers.
I will make sure to invest in a low risk fund in my Roth .

Just food for thought: once you have more assets you can reinvest the money being held in low-risk investments into something more growth oriented (e.g. into a stock index fund).

Typically emergency funds become less important the more your stache grows.  As always how much to keep in your e-fund is a very personal decision based on your individual comfort level and risk factors.

DadJokes

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Re: Roth ira contribution and emergency fund
« Reply #7 on: June 10, 2019, 12:09:17 PM »
I have about half of my emergency fund in my Roth IRA. I am gradually moving my entire fund over, $6k/year. The nice thing about the contribution limit is that it allows me to avoid sequence of returns risk.
« Last Edit: June 10, 2019, 01:43:09 PM by DadJokes »

Calimerostache

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Re: Roth ira contribution and emergency fund
« Reply #8 on: June 10, 2019, 08:54:54 PM »

Have you considered only having 1 year expenses less unemployment (which won't last the full year)? In the event of a job loss, it will still get you through the full one year. For use beyond job loss, it seems it would be sufficient for most things


Iíve not looked into unemployment . I have no idea what I would get.
The one year is a little arbitrary. 🙄
I figure that could cover big house repair, big medical emergency and job loss.
Again Iím pretty conservative !

How many months of expenses  are you guys considering for Emergency saving ?