The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: gdborton on May 13, 2013, 08:25:00 AM
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Seeing as you're allowed to withdraw contributions tax free, I'm trying to keep roughly $1,000 in checking and plan on using my Roth as my emergency fund.
What I'm unsure about, is how you repay yourself after taking money out?
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I could be wrong, but the way I understand it is that you will never be able to repay yourself.
Say you put in 5.5k one year and take out 2k that same year. You cannot put that 2k back in because you already hit your yearly limit of 5.5k.
Someone let me know if I'm wrong.
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Someone let me know if I'm wrong.
You're not wrong. You cannot "re-contribute" once contributions are removed from an IRA.
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Someone let me know if I'm wrong.
No, you're right. You have 5500 "one-way, one-dollar" tickets into the Roth IRA in 2013. No in and out privileges for the Roth IRA; once they leave, they're out. It isn't a Roth IRA loan or any such thing.
The purpose of keeping an emergency fund in a Roth IRA is if you have cash now, will have more than enough next year, and want to use this year's Roth capacity and next year's. You put it in, keep it in cash, and if an emergency comes up, you're no worse off than you would have been if you hadn't done this. If the emergency doesn't happen, as you replenish your emergency fund in your bank account, you move the equivalent dollars from the money market in Roth IRA to your investments.
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Wow, I'm really glad that I asked then... might be worthwhile to look into a no fee credit card for smaller emergencies.
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Wow, I'm really glad that I asked then... might be worthwhile to look into a no fee credit card for smaller emergencies.
Yes, except depending on the emergency, some lines of credit might get cut. So be wary of that. I'd keep at least some in an easily-accessible liquid form, such as the bank.
You can get check-writing privileges for some bond funds held in taxable at Vanguard if that's what you want.
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You can recontribute. But the money has to be put back in within 60 days of taking the distribution.
Probably not a good idea to plan to use an IRA as an emergency fund.
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Wow, I'm really glad that I asked then... might be worthwhile to look into a no fee credit card for smaller emergencies.
The idea of an emergency fund is to have liquid cash available. Not to wrack up debt.
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The idea of an emergency fund is to have liquid cash available. Not to wrack up debt.
Note the smaller emergencies bit, obviously I wouldn't start charging my life away. Anything that couldn't be covered in a month or two would come from IRA, why give up the tax free compounding interest if I don't have to. I suppose this could also come from a brokerage account other than IRA, but I haven't started any yet and also haven't looked into short term gains much.
You can re-contribute. But the money has to be put back in within 60 days of taking the distribution.
This would solve the CC problem.
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Note the smaller emergencies bit, obviously I wouldn't start charging my life away. Anything that couldn't be covered in a month or two would come from IRA, why give up the tax free compounding interest if I don't have to. I suppose this could also come from a brokerage account other than IRA, but I haven't started any yet and also haven't looked into short term gains much.
There are better investment options than an IRA to use as an emergency fund. But that poses a bigger problem that emergency funds are ideally in a no risk account. Stock market has been up the past several months. But when you might need to tap into it, the stock market might be down.. way down.
You can re-contribute. But the money has to be put back in within 60 days of taking the distribution.
This would solve the CC problem.
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Focus on getting 5k or so into a dedicated emergency fund. Then onto more risky things to do with your money.
EDIT: I've had second thoughts.
Open a money market fund in your Roth IRA, and use that as your emergency fund. This will open up tax free investing space for you, as it is limited every year.