Author Topic: Emergency fund in Roth IRA?  (Read 4378 times)

skunkfunk

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Emergency fund in Roth IRA?
« on: May 08, 2015, 11:57:44 AM »
So I know it's generally not good practice to keep the emergency fund in an IRA, but I've been considering taking $5500 of it and throwing it in a Roth. My plan is to just keep it in some sort of safe investment, or at least as safe as I can find at Vanguard. Is there any such fund? I just hate seeing it waste away in my bank account when I could leave it in a tax-sheltered account for later.

My current goals make it impossible to max a traditional IRA, and I figure that next year or the year after I'll essentially have $5500 more dollars to invest in the Roth than I would if it had been sitting in my bank account. In the meantime I can keep a credit card as the "emergency fund" and withdraw from the Roth to pay it off if I have something come up that my normal monthly surplus can't handle.

Is this dumb?

SuperSecretName

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Re: Emergency fund in Roth IRA?
« Reply #1 on: May 08, 2015, 12:11:02 PM »
your plan is perfectly acceptable and is what I did to get started.

you can put in a balanced fund at vanguard  of 60/40 stock/bond.

http://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

klystomane

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Re: Emergency fund in Roth IRA?
« Reply #2 on: May 08, 2015, 12:12:56 PM »
I'd say worst case scenario, the risk is that when an emergency arises, depending on market conditions, you may have to sell at a loss.

What constitutes an emergency for you?

SuperSecretName

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Re: Emergency fund in Roth IRA?
« Reply #3 on: May 08, 2015, 12:16:58 PM »
2/3 of people in one poll on bogleheads never used emergency fund.  Almost 20% used for < 3 months which credit cards, if set up in advance and you know how to use them, can cover.

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=152808&start=50

but yeah, everyone has a different definition of emergency.

curler

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Re: Emergency fund in Roth IRA?
« Reply #4 on: May 08, 2015, 12:22:41 PM »
I think it is important to clearly define the options here.  As I see them there are 3:
  • Contribute to your IRA (either Roth or Traditional) and have a large enough emergency fund that you don't need to consider the IRA part of the EF. 
  • Don't contribute to an IRA.  Keep the money in the emergency fund.
  • Contribute to a Roth IRA.  Consider the money part of your emergency fund.

Obviously #1 is preferable, but not always possible.  If the debate is between #2 and #3, I think #3 is the winner.  If you don't have an emergency, it is the same as #1.  If you do have an emergency, you are no worse off than #1.  What you need to make sure is that #1 is really impossible.  Can you cut elsewhere to be able to contribute to an IRA and still have a big enough emergency fund?

As to Klystomane's point, keep in mind that being in an IRA and being invested are not the same thing.  If you are worried about risk, you can establish an IRA at your bank in a savings account or CD, and then invest it once you don't need it to be part of your emergency fund.

skunkfunk

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Re: Emergency fund in Roth IRA?
« Reply #5 on: May 08, 2015, 12:40:09 PM »
I'd say worst case scenario, the risk is that when an emergency arises, depending on market conditions, you may have to sell at a loss.

What constitutes an emergency for you?

This year it was used to pay some medical bills for my child's birth. It took about 2 months of after-tax surplus and I didn't want to stop contributing to the 401K, so it took 2 months to top it back off.

What you need to make sure is that #1 is really impossible.  Can you cut elsewhere to be able to contribute to an IRA and still have a big enough emergency fund?

I'm into my 401K up to the company match and there is still plenty of room to increase this contribution. My wife also has some sort of pension plan through the state since she is a school teacher, and I haven't been able to figure out how that works well enough to tell how to contribute or withdraw from it. It's a bit confusing and the documents linked at the school web page are broken links, so I can't dig through the fine print.

Mostly, though, we've decided to spend the rest of the year paying down the mortgage. I've still got PMI and we're about $12k away from having it dropped. Next year that $12k can go into traditional IRAs. The math says paying down the PMI is better than the IRA tax breaks, as I'm only in the 15% tax bracket.

Seems the consensus will be that I should just go for it. I suppose selling at a loss isn't a big deal as long as I buy right back in ASAP.

GreenPen

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Re: Emergency fund in Roth IRA?
« Reply #6 on: May 08, 2015, 01:01:55 PM »
I'm in a very similar situation, and I'm using a Roth as a temporary location for some of my emergency fund. It's a good thing to do if you can't max out tax-advantaged accounts this year, but will be able to max out these accounts in the future. It's a temporary location for your emergency fund because in a future year, you will build up an emergency fund outside of the Roth after you have maxed out all of your tax-advantaged accounts. (And at that point, you can consider the original Roth funds an "investment" and part of your asset allocation, rather than as an emergency fund).

I'm not sure if I'm tracking the "selling at a loss" point. Presumably, inside your Roth IRA, you will invest in whatever vehicle you would have chosen if the funds were not in the Roth. So I guess the fear of selling at a loss might be a reason not to invest your emergency funds in certain vehicles rather than others. But I see this as an independent issue from whether or not to hold the emergency funds in a Roth.

skunkfunk

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Re: Emergency fund in Roth IRA?
« Reply #7 on: May 08, 2015, 01:05:41 PM »
I'm not sure if I'm tracking the "selling at a loss" point. Presumably, inside your Roth IRA, you will invest in whatever vehicle you would have chosen if the funds were not in the Roth. So I guess the fear of selling at a loss might be a reason not to invest your emergency funds in certain vehicles rather than others. But I see this as an independent issue from whether or not to hold the emergency funds in a Roth.

We're definitely in similar situations. I currently keep about 1/3-1/2 of the emergency fund in a checking account that gets 1.49% (the rest is already in the IRA, though I had planned never to need that portion and haven't needed it) which won't be available in the IRA, hence the potential "selling at a loss" thing.

PDXstash

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Re: Emergency fund in Roth IRA?
« Reply #8 on: May 08, 2015, 02:13:36 PM »
In case the collective replies haven't made it clear, what I think GreenPen is getting at is that you can invest in something safe in a Roth IRA while using as your emergency fund, so losses don't have to be an issue.  Whenever you have sufficient cash in your emergency fund, transfer that safe Roth holding into your usual investment allocation.

I've done this before - just keep 5-10k or whatever your number is in a money market or short-term bond mutual fund in your Roth and call it your emergency fund.  Next year (or whenever it's no longer needed for that), move it to VTSAX.  As others have pointed out, this way you won't miss any years of contribution.

Jeremy E.

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Re: Emergency fund in Roth IRA?
« Reply #9 on: May 08, 2015, 04:12:00 PM »
Correct me if I'm wrong, but if you put money into a Roth IRA, it must remain there for 5 years before you can withdraw it without penalty. I'm not sure if this applies to you, but I have a house that's almost half paid off, and I have a HELOC that I use in case of emergency.

seattlecyclone

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Re: Emergency fund in Roth IRA?
« Reply #10 on: May 08, 2015, 04:56:01 PM »
Correct me if I'm wrong, but if you put money into a Roth IRA, it must remain there for 5 years before you can withdraw it without penalty.

You're wrong. Conversions from traditional IRA/401(k) accounts are subject to a five-year waiting period, but direct contributions to the Roth IRA can be withdrawn at any time with no penalty.

Rubic

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Re: Emergency fund in Roth IRA?
« Reply #11 on: May 08, 2015, 04:56:23 PM »
Correct me if I'm wrong, but if you put money into a Roth IRA, it must remain there for 5 years before you can withdraw it without penalty. I'm not sure if this applies to you, but I have a house that's almost half paid off, and I have a HELOC that I use in case of emergency.

In a Roth IRA you may withdraw up to the amount of your original contribution without penalty.

Other events that won't trigger an early withdrawal penalty include:
  • the money is used to buy, build or rebuild a first home, up to a $10,000 maximum, and is spent within the 120 days of the withdrawal.
  • the money is withdrawn because you suffered a disability