Author Topic: Use Roth as emergency fund?  (Read 2440 times)

MountainTown

  • Stubble
  • **
  • Posts: 195
Use Roth as emergency fund?
« on: February 21, 2017, 02:01:30 PM »
I try to keep about $10,000 to $15,000 in a liquid savings account--cash. I am considering putting 5000 each in a Roth IRA for my wife and I this year. Any thoughts? I had thought about doing traditional IRA but I do like that ultimately I could use the contributions at anytime for a Roth so it could be a true E-fund with little/no consequences as long as I don't invest it heavily in market.

We make about $115,000 a year. Have $82,000 saved in total. We are currently saving for a down payment on a house. We have such a high cash position because the house prices have been climbing here and we have been outbid on a lot of stuff for $20k over asking.

I guess I am also curious what people think...is it better to just keep the money liquid in a cash account or is setting it aside in a Roth wise? I am inclined to do this as I have never used the E-fund in my life so like the idea of it at least having some tax value.

Thanks!

terran

  • Handlebar Stache
  • *****
  • Posts: 1407
Re: Use Roth as emergency fund?
« Reply #1 on: February 21, 2017, 02:41:16 PM »
If you otherwise can't contribute to an IRA then it's better than losing the space, so I say go for it. Try to catch up at some point to reduce the danger of having to withdraw though. Here's some info: https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

MountainTown

  • Stubble
  • **
  • Posts: 195
Re: Use Roth as emergency fund?
« Reply #2 on: February 21, 2017, 02:44:21 PM »
Our AGI this year was around 86,000 so we  can still do traditional IRA's. We have deferred comp, 403b, and tsp space still though. We have not yet maxed those out as we have been piling into our down payment fund. We Were able to do about $20k into deferred retirement last year and still save a heft amount for down payment. It's killing me to not be able to do more but we need that down payment to buy anything in this town. Ideally we would have $100k so the mortgage is doable on our income.

laceconprof

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Use Roth as emergency fund?
« Reply #3 on: February 21, 2017, 02:52:08 PM »
I think this is a tough one. Jim Collins in The Simple Path to Wealth strongly recommends having some cash just in a checking account for emergencies. But I've ended up on the same page as you. I have three months' worth of expenses in a cash account, but justify to myself that I can put other expenditures on a credit card if necessary and withdraw from a Roth IRA to cover that if I really, really have to. So I end up putting into the Roth IRA as if it were a supplement to the 'emergency' account in the hope that I'm actually just tricking myself by doing so and I won't have to take advantage of it (so far, so good).

Sent from my Nexus 6P using Tapatalk


MountainTown

  • Stubble
  • **
  • Posts: 195
Re: Use Roth as emergency fund?
« Reply #4 on: February 21, 2017, 02:54:07 PM »
hmmm...actually maybe I could just split the difference right? 5500 in the ROth for now and leave another 55000 set aside in cash...that way for most emergencies I would have some non-ira cash...


Thanks for that resource from bogleheads. Really relevant.

RangerOne

  • Pencil Stache
  • ****
  • Posts: 685
Re: Use Roth as emergency fund?
« Reply #5 on: February 21, 2017, 03:10:22 PM »
With $15k I would consider it temporarily. I may be in the same boat soon, but I am tempted to open another IRA under my wife to keep avoiding the 25% tax bracket as well...

Basically though if I were you I would want to keep at least $2k-$5k in my local bank for fast access. That would easily let you lock up the other $10k for true emergencies, with the intent to not touch unless shit really hit the fan. This is generally how I use my emergency fund. Much of it is truly for emergencies, but some of it, maybe like $2k is a buffer for more common surprises that aren't really emergencies but may just overextend us for the month. That money is basically my fast access credit for a rough month.

I believe the wiki that was linked also recommends holding your emergency fund in cash until you are ready to roll it over into a risky investment by opening say a money market fund inside of a ROTH IRA. The idea being that you don't lose your contribution window, but you also truly keep that money available for emergency with no risk of lose at least until you are ready to add more money the following year at which point you can start to invest the part you aren't worried about losing.

If you are talking about immoderately investing it into to stocks in a fashion like that put forward by betterment in a more conservative portfolio like a 60/40, that is a bit different. If you want to do that then I think you just need to make sure that you are comfortable losing 30-40% of that buffer overnight if we hit a bumpy few years. So your E fund would need to be bigger than you truly are trying to keep.

Spork

  • Walrus Stache
  • *******
  • Posts: 5759
    • Spork In The Eye
Re: Use Roth as emergency fund?
« Reply #6 on: February 23, 2017, 08:16:41 AM »
The thing about emergency funds is (at least in my case) you DO use them. 

The Roth would certainly cover emergencies, but the downside I see is: you can't exactly pay them back.  If you pull $15k out to make emergency repairs on your house, you won't be able to save that $15k back up and put it back into the Roth.  You'll be stuck contributing the max yearly amount.  And you'll miss out on the benefit of the Roth: The ability to withdraw the compounded income/interest tax free.

Now the question here is: Does that matter?  If I were considering this, I'd make a spreadsheet where I showed max yearly contributions and income over time and an emergency fund sitting in a money market account earning low interest. 

Then I'd make another set of columns where I showed all of the money in the Roth and a couple of emergencies every few years.  Compare the outcomes and you get a sense of whether it matters or not.  My suspicion is you're better off with the emergency fund in a money market account, but I'm just as likely to be wrong on that.


laceconprof

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Use Roth as emergency fund?
« Reply #7 on: February 23, 2017, 08:40:36 AM »
I suspect the idea is to use it temporarily as an emergency fund while you're building up the actual emergency fund. This is how I've approached it where I'm not quite where I want to be with emergency, but I want to also build up my Roth IRA, so I've contribute less to my emergency in lieu of contributing more to Roth. But my intention is to use  credit card, then what exists of emergency fund, then Roth in a kind of emergency pyramid. Not sure if it'll work, but it has so far...

Sent from my Nexus 6P using Tapatalk


ReadySetMillionaire

  • Pencil Stache
  • ****
  • Posts: 817
  • Location: The Buckeye State
Re: Use Roth as emergency fund?
« Reply #8 on: March 13, 2018, 09:11:39 AM »
I know this is an old post, but I'm considering this and wanted to bump this thread to see if anyone is currently using this strategy.

Right now I have $8,000 in checking and $10,000 in an Ally account earning 1.45% interest.  I also have about $5,000 in an HSA, and that goes up about $400/month via direct contributions from my paycheck.

So I have the checking, savings, and HSA; and then we have about a $14,000 line of credit; and then we would have about $11,000 in Roth contributions as the final backup.  This seems to be plenty of cushion, and if shit really hit the fan, we could stop auto contributions and probably replenish pretty quickly.

Any thoughts?

terran

  • Handlebar Stache
  • *****
  • Posts: 1407
Re: Use Roth as emergency fund?
« Reply #9 on: March 13, 2018, 11:54:47 AM »
I know this is an old post, but I'm considering this and wanted to bump this thread to see if anyone is currently using this strategy.

Right now I have $8,000 in checking and $10,000 in an Ally account earning 1.45% interest.  I also have about $5,000 in an HSA, and that goes up about $400/month via direct contributions from my paycheck.

So I have the checking, savings, and HSA; and then we have about a $14,000 line of credit; and then we would have about $11,000 in Roth contributions as the final backup.  This seems to be plenty of cushion, and if shit really hit the fan, we could stop auto contributions and probably replenish pretty quickly.

Any thoughts?

At the end of the day this comes down to whether or not you can otherwise max out all available tax advantaged space. If you can, do that and leave your emergency fund where it is. If you can't, then you should definitely contribute your emergency fund to Roth since the worst that happens is you need to spend your emergency fund and you're no worse off then you would have been otherwise because you now have no emergency fund and no (additional) Roth, but that's where you'd be if you hadn't contributed too. On the other hand, maybe you don't need to spend the emergency fund and then you're better off since you have more money in tax advantaged accounts than if you hadn't contributed your emergency fund to roth.

Remember that putting your emergency fund in Roth is not the same as investing your emergency fund. They're totally separate considerations and shouldn't be made together. You can even open a Roth at a bank (like Ally) and put it in a CD. There are tons of "should I have an emergency fund?" threads on the forum that deal with the question of investing all available money vs keeping some in a place that's unlikely to lose value.

palebluedot

  • Stubble
  • **
  • Posts: 144
  • Location: NJ
Re: Use Roth as emergency fund?
« Reply #10 on: March 13, 2018, 07:59:30 PM »
It all depends on your comfort zone. I think as long as you don't have any hair on fire debt while leaving an emergency fund earning pennies when you can be paying the debt off, you're okay. I like this guy's approach.

https://earlyretirementnow.com/2016/05/05/emergency-fund/

MountainTown

  • Stubble
  • **
  • Posts: 195
Re: Use Roth as emergency fund?
« Reply #11 on: March 25, 2018, 09:39:36 AM »
As the OP...I would say that I -did- use my strategy and had/have no regrets. I have had way too much sitting in cash and looking back  I really regret the lost years of coulda been roth contributions(years!!). I did it, at the time, because I was also saving for a down payment. Eventually I realized that even $10000 can be used from a TIRA for a down payment and as we all know any contributions up to any number can be used from a Roth.

So actually I started funding a TIRA instead of a Roth because of the tax advantages. I did do a Roth that first year and actually wish I would have done the TIRA.

Other considerations: Just don't forget that there is some hassle factor here. You are going to think about it differently. I think it really makes sense to think about what emergencies may come up...and realistically how you would get that money. For example I have to remind myself that even for a CD....it may take 3-5 business days for me to get that money in my account. If you are really tight on your month-to-month and an emergency comes up that could be tricky. A roth will be equally tough to liquidate. That being said...most emergencies can be temporarily funded on a credit card, you liquidate the Roth, and payoff the CC a week later.

In conclusion, if you are not maxing out a TIRA or a Roth but have that $5500 sitting aside for an emergency fund...yes I would go ahead and throw it in one of those accounts and put it in a CD.