Author Topic: Roth IRA as Emergency Fund?  (Read 8190 times)

j250432

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Roth IRA as Emergency Fund?
« on: December 27, 2014, 01:36:43 PM »
Hi,

I was just wondering about everyone's thoughts on using a Roth IRA as an emergency fund.

Currently, I have a traditional 401K that a percentage of my salary is already devoted toward, which I am happy with.

However, I have a small amount of emergency funds (roughly 5K) sitting in a money market earning paltry interest.

I figured I'd throw about 4K of it into a Roth IRA and receive a higher return than I would if I just let it sit in the money market.

I know this can be a bit risky as it may take 3-4 days to get that $$$ if i need it in a true emergency, but it may be worth the higher return.


Thoughts?




mustachianteacher

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Re: Roth IRA as Emergency Fund?
« Reply #1 on: December 27, 2014, 02:06:08 PM »
We use our Roth IRA as an emergency fund of sorts, but it's not our short-term emergency fund. We have about $10K in a regular savings account earning almost nothing, but that's our go-to emergency fund. When a huge branch broke the living room window, for example, we paid for it out of that. We have incredibly secure jobs with very little chance of a layoff, so that $10K does not represent 3 months' of living expenses, but it's enough to deal with expensive, unexpected blows.

If something really horrendous were to happen (catastrophic injury to one of us, natural disaster requiring relocation, long-term illness, etc.) then I know we would be able to dip into our Roth money. We've never had to do that, though, and hopefully we will never have to. We'd rather grow our $10K savings to $20K simply to prevent having to take money out of investments.

All of this is a preface to saying no, I don't think it's a good idea to put $4k of your $5K into your Roth IRA. It's not liquid enough, and many emergencies cost more than $1K. Low returns are a bummer, but having to sell investments at a bad time and giving up future returns on that money is worse. Plus, you only mention higher returns, but losing money is also a very real possibility. What if something terrible happens, you need $3,500, and it turns out that the market's been doing poorly, and your $5K is only worth about $4K at that time? Emergencies are stressful enough on their own, but it will be downright painful feeling forced to sell at that moment, and that will just add to the stress.

 If you still want to maximize your returns, I'd keep the $5K liquid, put it out of your mind, and then start siphoning more money into your Roth on a monthly basis.

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #2 on: December 27, 2014, 02:14:13 PM »
I keep part of my cash EF in my Roth.  I have about a month's expenses outside the Roth but the rest of the cash lives in the Roth.  I'd rather have cash in the Roth and mutual funds in a taxable account.  However, we live well below our means and in 2015 it looks like we will be saving more than my entire salary so we have a bunch of flexibility.  You have to very disciplined for this to work though.

r3dt4rget

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Re: Roth IRA as Emergency Fund?
« Reply #3 on: December 27, 2014, 02:21:08 PM »
This is what MMM does. Roth IRA contributions are very liquid. It should be no problem to put $5k on a credit card, and simply wait for your investment transfer to pay it off on the normal statement payment date.

Catbert

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Re: Roth IRA as Emergency Fund?
« Reply #4 on: December 27, 2014, 02:33:11 PM »
I think it's likely a good idea.  As someone else noted you can use a cc to bridge the time gap between the emergency and accessing Roth money.  In part though, it depends on what "emergency" means to you.  If "emergencies" are things that happen 3 or 4 times a year (i.e., car repair, great deal on a vacation, dental crown replacement) then its not practical to keep emergency money in a Roth because you'll be needing it soon.  OTOH if "emergencies" are rare then it makes sense to keep in a Roth.


Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #5 on: December 27, 2014, 02:44:25 PM »
I think it's likely a good idea.  As someone else noted you can use a cc to bridge the time gap between the emergency and accessing Roth money.  In part though, it depends on what "emergency" means to you. If "emergencies" are things that happen 3 or 4 times a year (i.e., car repair, great deal on a vacation, dental crown replacement) then its not practical to keep emergency money in a Roth because you'll be needing it soon.  OTOH if "emergencies" are rare then it makes sense to keep in a Roth.
LOL, those are part of the slush fund, which is why I feel comfortable having my cash in the Roth.

j250432

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Re: Roth IRA as Emergency Fund?
« Reply #6 on: December 27, 2014, 04:12:11 PM »
Thanks for the replies, guys. Really appreciate it.

I think I will leave the 5K in an EF mmk for now until I get a CC.  (I currently do not have one.)

I'm open to all suggestions for which CC to choose, however!

I know, I know, "browse around on the site, theres a post about it somewhere...

Jags4186

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Re: Roth IRA as Emergency Fund?
« Reply #7 on: December 27, 2014, 05:36:03 PM »
If you have a modest income/savings you should 100% be using the Roth IRA as an Emergency fund.

The Roth IRA is just an account type, not an investment.

Having $5500 in a savings account at your local bank is no different then having $5500 sitting in your cash account at whatever brokerage you keep your Roth IRA at.

What you should be doing is this:

Let's say you call $5500 your full emergency fund.  what you should do is this:

1) deposit all $5500 emergency fund into Roth IRA, leave in cash account
2) continue saving into your regular savings account at whatever rate you can save
3) for every dollar you save in your savings account, you can convert an equal amount of your Roth IRA cash into a mutual fund. 

This way you always have $5500 in cash and if you don't have any emergencies, you've maxed out your Roth IRA for the year! 

Left

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Re: Roth IRA as Emergency Fund?
« Reply #8 on: December 27, 2014, 05:50:05 PM »
I don't use roth ira as an emergency fund since I want it to keep growing. Once you take it out, it's out :S better to use taxable in my opinion since I can refill it later which is what my plan is

I keep 10k cash in money market account as "cash" on hand, but my real emergency funds are my credit cards (I have high enough limits, around 50k, plus I can get cash back on an emergency if I charge it). If it is a job loss type emergency (I haven't lost job before yet so I don't know how well this works in action), I have the mentioned 10k for the month or two while I look for work. Other emergencies that goes onto credit card gets paid off with my paycheck at end of month. Anything larger, I use my taxable account (again, hasn't happened yet).

So that's my emergency fund plan, credit cards->money market account - > taxable investments
« Last Edit: December 27, 2014, 05:55:37 PM by eyem »

AK

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Re: Roth IRA as Emergency Fund?
« Reply #9 on: December 27, 2014, 05:53:34 PM »
I'm like msjd123. I have around 10K in cash and have been contributing to a Roth IRA for a second tier emergency fund if things really hit the fan.

Until fairly recently, I've had a couple low limit CCs with no balances on them because I don't like having debt. Thanks to MMM and others, I now feel differently about them so I plan on getting higher limit reward CCs, since the balances are always paid in full, and have that act as part of the emergency fund.

follicular

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Re: Roth IRA as Emergency Fund?
« Reply #10 on: December 27, 2014, 06:38:26 PM »
i believe there are withdrawal restrictions on roth or any other tax-favored retirement accounts, especially if you are less than 59.5 yo. And the laws have changed in 2015 to make it even more restrictive to withdraw such funds. Besides a 10% penalty for 'early withdrawal', if you dont replace the funds within 60 days, unless the funds are withdrawn for a bona fide emergency or certain other limited reasons, there may be some tax ramifications. And coming next year you will be able to make only 1 such withdrawal per social security number, not retirement account.
Beware!

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #11 on: December 27, 2014, 07:18:51 PM »
i believe there are withdrawal restrictions on roth or any other tax-favored retirement accounts, especially if you are less than 59.5 yo. And the laws have changed in 2015 to make it even more restrictive to withdraw such funds. Besides a 10% penalty for 'early withdrawal', if you dont replace the funds within 60 days, unless the funds are withdrawn for a bona fide emergency or certain other limited reasons, there may be some tax ramifications. And coming next year you will be able to make only 1 such withdrawal per social security number, not retirement account.
Beware!
Do you have a link to that? 
This is from fidelity "For Roth IRAs, you can always remove post-tax penalty contributions (also known as "basis") from your Roth IRA without penalty."

Davids

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Re: Roth IRA as Emergency Fund?
« Reply #12 on: December 27, 2014, 08:38:37 PM »
While I do not do it as I maintain an emergency savings account with Capital One 360 (Formerly ING) I do not object to anyone using a Roth IRA as an emergency fund since you can withdraw principal at any time with no penalty.

Daisy

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Re: Roth IRA as Emergency Fund?
« Reply #13 on: December 27, 2014, 08:56:15 PM »
I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

j250432

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Re: Roth IRA as Emergency Fund?
« Reply #14 on: December 27, 2014, 09:23:02 PM »
I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

Daisy

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Re: Roth IRA as Emergency Fund?
« Reply #15 on: December 27, 2014, 09:53:19 PM »
I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #16 on: December 28, 2014, 09:36:00 AM »
I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.
Except that you can have mutual funds taxed at 0-15% in a taxable but cash is always your highest rate.  Why not put one month's cash in the Roth if you have the space.  Not everyone has enough money to fully fund their 401k/403b plus IRAs plus an EF.

arebelspy

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Re: Roth IRA as Emergency Fund?
« Reply #17 on: December 28, 2014, 09:50:46 AM »

I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.

There is a benefit, even if you only keep it in cash, in that once contribution time passes, you never get that back. But if you don't need the EF, later you can invest that money (within the Roth).

In other words, it just gives you more in the Roth, even if you don't invest it in anything risky for a few years, if you end up not needing it and investing it at that point, it's still money in the Roth which is better than money in a taxable account.

I mean yeah, keep more of your funds invested. But if you aren't comfortable with that, and want your emergency fund in cash, there is still an advantage to having it in the Roth in that later it's extra money in your Roth. (This wouldn't be the case if Roth contributions were unlimited, but since they're capped that's an advantage.)

You also have the advantage of it being hard to access, so you don't use it willy-nilly. (Though that could be seen as a disadvantage, it taking awhile to access.)
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Daisy

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Re: Roth IRA as Emergency Fund?
« Reply #18 on: December 28, 2014, 12:49:16 PM »

I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.

There is a benefit, even if you only keep it in cash, in that once contribution time passes, you never get that back. But if you don't need the EF, later you can invest that money (within the Roth).

In other words, it just gives you more in the Roth, even if you don't invest it in anything risky for a few years, if you end up not needing it and investing it at that point, it's still money in the Roth which is better than money in a taxable account.

I mean yeah, keep more of your funds invested. But if you aren't comfortable with that, and want your emergency fund in cash, there is still an advantage to having it in the Roth in that later it's extra money in your Roth. (This wouldn't be the case if Roth contributions were unlimited, but since they're capped that's an advantage.)

You also have the advantage of it being hard to access, so you don't use it willy-nilly. (Though that could be seen as a disadvantage, it taking awhile to access.)

I suppose if it's an either/or situation of cash in a checking account vs. cash in a Roth IRA then you can think of it that way. You put cash into a Roth IRA until you have enough time to build up a cash taxable fund, then you can fully invest the cash you have in the Roth IRA.

I guess it's a personal decision but I would want my cash emergency fund easily accessible. If you are that tight for funds that you don't have enough taxable money around then maybe you should reconsider how much to put in retirement accounts. This all depends on age and risk averseness though.

Someone above mentioned being invested in a mutual fund for their emergency funds, and that's not what an emergency fund is. You don't want your emergency fund invested in something that may go down in value in the short-term during a market crash, when you most likely would need the emergency fund. It should be non-invested and in cash.

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #19 on: December 28, 2014, 01:39:50 PM »

I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.

There is a benefit, even if you only keep it in cash, in that once contribution time passes, you never get that back. But if you don't need the EF, later you can invest that money (within the Roth).

In other words, it just gives you more in the Roth, even if you don't invest it in anything risky for a few years, if you end up not needing it and investing it at that point, it's still money in the Roth which is better than money in a taxable account.

I mean yeah, keep more of your funds invested. But if you aren't comfortable with that, and want your emergency fund in cash, there is still an advantage to having it in the Roth in that later it's extra money in your Roth. (This wouldn't be the case if Roth contributions were unlimited, but since they're capped that's an advantage.)

You also have the advantage of it being hard to access, so you don't use it willy-nilly. (Though that could be seen as a disadvantage, it taking awhile to access.)

I suppose if it's an either/or situation of cash in a checking account vs. cash in a Roth IRA then you can think of it that way. You put cash into a Roth IRA until you have enough time to build up a cash taxable fund, then you can fully invest the cash you have in the Roth IRA.

I guess it's a personal decision but I would want my cash emergency fund easily accessible. If you are that tight for funds that you don't have enough taxable money around then maybe you should reconsider how much to put in retirement accounts. This all depends on age and risk averseness though.

Someone above mentioned being invested in a mutual fund for their emergency funds, and that's not what an emergency fund is. You don't want your emergency fund invested in something that may go down in value in the short-term during a market crash, when you most likely would need the emergency fund. It should be non-invested and in cash.
Why?  If something goes wrong I can access the money in less than a week, and I do most of my spending in credit cards anyway so a week is no big deal but this way if I don't need the money it lives in the Roth and as I increase my savings/income the amount I can have outside and inside retirement increases.  We put enough in our 403bs to get down to the 10% bracket and any little bit extra goes in the Roth.  It is not like I'll be harmed if I pull it out.

Daisy

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Re: Roth IRA as Emergency Fund?
« Reply #20 on: December 28, 2014, 01:52:41 PM »

I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.

There is a benefit, even if you only keep it in cash, in that once contribution time passes, you never get that back. But if you don't need the EF, later you can invest that money (within the Roth).

In other words, it just gives you more in the Roth, even if you don't invest it in anything risky for a few years, if you end up not needing it and investing it at that point, it's still money in the Roth which is better than money in a taxable account.

I mean yeah, keep more of your funds invested. But if you aren't comfortable with that, and want your emergency fund in cash, there is still an advantage to having it in the Roth in that later it's extra money in your Roth. (This wouldn't be the case if Roth contributions were unlimited, but since they're capped that's an advantage.)

You also have the advantage of it being hard to access, so you don't use it willy-nilly. (Though that could be seen as a disadvantage, it taking awhile to access.)

I suppose if it's an either/or situation of cash in a checking account vs. cash in a Roth IRA then you can think of it that way. You put cash into a Roth IRA until you have enough time to build up a cash taxable fund, then you can fully invest the cash you have in the Roth IRA.

I guess it's a personal decision but I would want my cash emergency fund easily accessible. If you are that tight for funds that you don't have enough taxable money around then maybe you should reconsider how much to put in retirement accounts. This all depends on age and risk averseness though.

Someone above mentioned being invested in a mutual fund for their emergency funds, and that's not what an emergency fund is. You don't want your emergency fund invested in something that may go down in value in the short-term during a market crash, when you most likely would need the emergency fund. It should be non-invested and in cash.
Why?  If something goes wrong I can access the money in less than a week, and I do most of my spending in credit cards anyway so a week is no big deal but this way if I don't need the money it lives in the Roth and as I increase my savings/income the amount I can have outside and inside retirement increases.  We put enough in our 403bs to get down to the 10% bracket and any little bit extra goes in the Roth.  It is not like I'll be harmed if I pull it out.

The Roth IRA is an after-tax account, so the only benefit (other than inheritance issues - not relevant here) to having money in a Roth IRA vs. taxable accounts is the tax free growth provided in the Roth IRA. If it's just sitting in cash, there is no benefit to have it sitting in a Roth IRA and have to file paperwork and risk a potential tax audit (however unlikely that is) by constantly raiding your Roth IRA funds. You should put your highest growth funds in the Roth IRA so they compound tax free.

Of course, if you don't have enough money to place in a Roth IRA AND a taxable account, then I can see the Roth IRA sitting in cash as a short-term plan until your taxable account is enough to fund emergencies.

Once you take money out of the Roth IRA then you can't put it back in and you are limited by the yearly limits on contributing to IRAs. Why would you want to raid your retirement funds for emergencies you know you will encounter through life? I mean, it's a good safety cushion in case something really major happens like a huge health scare, but in that case you probably wouldn't mind paying a 10% early withdrawal fee on any retirement account, let alone a Roth IRA.
« Last Edit: December 28, 2014, 01:57:37 PM by Daisy »

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #21 on: December 28, 2014, 02:32:43 PM »

I don't see the point.

An emergency fund should be kept in cash. What's the advantage of having cash sit in a Roth IRA account vs. a regular savings account? It's not being invested either way.

It's best to have your Roth IRA funds fully invested since they are growing tax free. Why would you want to keep tax-free growth sitting in cash???

Keep your emergency funds in cash in the taxable space.

Maybe I am wrong, but with the Roth IRA I figured i could potentially see a higher return (lets just say 6%) compared to leaving the money sitting idly in the money market account for like 1%.....

A Roth IRA is just an account type, not an investment type. So if you are gaining 6% from your investment in the Roth IRA, it is not sitting in cash. A true emergency fund is sitting in cash. So there's no difference in having cash in a Roth IRA vs. a regular taxable checking or savings account. The benefit of the Roth IRA is any money invested in there is free from tax, so it's best to have all of your money in a Roth IRA fully invested.

There is a benefit, even if you only keep it in cash, in that once contribution time passes, you never get that back. But if you don't need the EF, later you can invest that money (within the Roth).

In other words, it just gives you more in the Roth, even if you don't invest it in anything risky for a few years, if you end up not needing it and investing it at that point, it's still money in the Roth which is better than money in a taxable account.

I mean yeah, keep more of your funds invested. But if you aren't comfortable with that, and want your emergency fund in cash, there is still an advantage to having it in the Roth in that later it's extra money in your Roth. (This wouldn't be the case if Roth contributions were unlimited, but since they're capped that's an advantage.)

You also have the advantage of it being hard to access, so you don't use it willy-nilly. (Though that could be seen as a disadvantage, it taking awhile to access.)

I suppose if it's an either/or situation of cash in a checking account vs. cash in a Roth IRA then you can think of it that way. You put cash into a Roth IRA until you have enough time to build up a cash taxable fund, then you can fully invest the cash you have in the Roth IRA.

I guess it's a personal decision but I would want my cash emergency fund easily accessible. If you are that tight for funds that you don't have enough taxable money around then maybe you should reconsider how much to put in retirement accounts. This all depends on age and risk averseness though.

Someone above mentioned being invested in a mutual fund for their emergency funds, and that's not what an emergency fund is. You don't want your emergency fund invested in something that may go down in value in the short-term during a market crash, when you most likely would need the emergency fund. It should be non-invested and in cash.
Why?  If something goes wrong I can access the money in less than a week, and I do most of my spending in credit cards anyway so a week is no big deal but this way if I don't need the money it lives in the Roth and as I increase my savings/income the amount I can have outside and inside retirement increases.  We put enough in our 403bs to get down to the 10% bracket and any little bit extra goes in the Roth.  It is not like I'll be harmed if I pull it out.

The Roth IRA is an after-tax account, so the only benefit (other than inheritance issues - not relevant here) to having money in a Roth IRA vs. taxable accounts is the tax free growth provided in the Roth IRA. If it's just sitting in cash, there is no benefit to have it sitting in a Roth IRA and have to file paperwork and risk a potential tax audit (however unlikely that is) by constantly raiding your Roth IRA funds. You should put your highest growth funds in the Roth IRA so they compound tax free.

Of course, if you don't have enough money to place in a Roth IRA AND a taxable account, then I can see the Roth IRA sitting in cash as a short-term plan until your taxable account is enough to fund emergencies.

Once you take money out of the Roth IRA then you can't put it back in and you are limited by the yearly limits on contributing to IRAs. Why would you want to raid your retirement funds for emergencies you know you will encounter through life? I mean, it's a good safety cushion in case something really major happens like a huge health scare, but in that case you probably wouldn't mind paying a 10% early withdrawal fee on any retirement account, let alone a Roth IRA.
You can put it back within 60 days and when I am saving 25% in my 403b and can put the extra in Roth which may or may not be needed while I am in 10% bracket, when the only risk is maybe needing to pull it out, I don't see the problem.  This is money over retirement money.  But again this is only for people who are lower income and cannot max out everything. 

Daisy

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Re: Roth IRA as Emergency Fund?
« Reply #22 on: December 28, 2014, 04:51:47 PM »
You can put it back within 60 days and when I am saving 25% in my 403b and can put the extra in Roth which may or may not be needed while I am in 10% bracket, when the only risk is maybe needing to pull it out, I don't see the problem.  This is money over retirement money.  But again this is only for people who are lower income and cannot max out everything.

I didn't know about that trick. Well then, the plan makes more sense now. I approve!

Although I still think it's better to work towards the goal of having this money in your taxable accounts. That way, you can take full advantage of tax-free growth in your Roth IRA. Here's wishing to some salary increases so you can get to this point.

Happy investing!

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #23 on: December 28, 2014, 05:00:12 PM »
You can put it back within 60 days and when I am saving 25% in my 403b and can put the extra in Roth which may or may not be needed while I am in 10% bracket, when the only risk is maybe needing to pull it out, I don't see the problem.  This is money over retirement money.  But again this is only for people who are lower income and cannot max out everything.

I didn't know about that trick. Well then, the plan makes more sense now. I approve!

Although I still think it's better to work towards the goal of having this money in your taxable accounts. That way, you can take full advantage of tax-free growth in your Roth IRA. Here's wishing to some salary increases so you can get to this point.

Happy investing!
Well that would be a total of $35K, more than a 50% increase so that may be a while but I hope so too!

RyeWhiskey

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Re: Roth IRA as Emergency Fund?
« Reply #24 on: December 29, 2014, 12:32:23 AM »
I'm going to disagree with the majority and say that your Roth should not be an EF simply because tax shelters do not grow on trees and once you withdraw the money that space is lost forever.

Save the tax shelters for growth investments and those which are tax inefficient, not cash or cash-like items. Keep your EF in a taxable account and your retirement funds where they'll compound most effectively- in the Roth.

Catbert

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Re: Roth IRA as Emergency Fund?
« Reply #25 on: December 29, 2014, 10:40:52 AM »
You can put it back within 60 days and when I am saving 25% in my 403b and can put the extra in Roth which may or may not be needed while I am in 10% bracket, when the only risk is maybe needing to pull it out, I don't see the problem.  This is money over retirement money.  But again this is only for people who are lower income and cannot max out everything.

I didn't know about that trick. Well then, the plan makes more sense now. I approve!

Although I still think it's better to work towards the goal of having this money in your taxable accounts. That way, you can take full advantage of tax-free growth in your Roth IRA. Here's wishing to some salary increases so you can get to this point.

Happy investing!
Well that would be a total of $35K, more than a 50% increase so that may be a while but I hope so too!

Caveat:  You can only do the 60 day "borrowing"thing once in any 365 day period.   

frugaliknowit

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Re: Roth IRA as Emergency Fund?
« Reply #26 on: December 29, 2014, 11:07:21 AM »
First, make the distinction between "slush fund" and "emergency fund".  A scheduled car tune up is not an emergency. 

Assuming you will have additional funds to build the Roth, it is a good practice to establish it with your emergency fund, then keep adding to it until it becomes maxed out, then start building your emergency reserves outside of the Roth.  While your emergency fund is (only) in your Roth, it should not be invested aggressively (I know, mustacians say no to this, but I disagree).

Once the Roth is maxed and your emergency reserves outside of the Roth are adequate, you can turn up the risk on the Roth and no longer consider it part of your emergency fund.

Jags4186

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Re: Roth IRA as Emergency Fund?
« Reply #27 on: December 30, 2014, 08:10:06 AM »

First, make the distinction between "slush fund" and "emergency fund".  A scheduled car tune up is not an emergency. 

Assuming you will have additional funds to build the Roth, it is a good practice to establish it with your emergency fund, then keep adding to it until it becomes maxed out, then start building your emergency reserves outside of the Roth.  While your emergency fund is (only) in your Roth, it should not be invested aggressively (I know, mustacians say no to this, but I disagree).

Once the Roth is maxed and your emergency reserves outside of the Roth are adequate, you can turn up the risk on the Roth and no longer consider it part of your emergency fund.

Exactly.  You don't use your emergency fund as your checking account. It is above and beyond your regular life expenses. Needing new tires because yours are bald isn't an emergency, it's an expense you plan for.  An emergency is a tree falls on your house and busts a hole in your roof.

If you can only save 10k a year, and you want a 10k emergency fund, you should do something similar to below:

Year 1:  5500 Roth IRA-cash, 4500 savings account

Year 2: 1000 Roth IRA-cash, 10000 Roth IRA-investments, 9000 savings account-cash

Year 3: 16500 Roth IRA-investments, 10000 savings account-cash, 3500 taxable account-investments

Of course now if you have an emergency you should raid your savings account first, not your Roth IRA. But assuming you don't, that's how you should structure your savings.

GingerStache

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Re: Roth IRA as Emergency Fund?
« Reply #28 on: December 30, 2014, 08:30:25 AM »

If you can only save 10k a year, and you want a 10k emergency fund, you should do something similar to below:

Year 1:  5500 Roth IRA-cash, 4500 savings account

Year 2: 1000 Roth IRA-cash, 10000 Roth IRA-investments, 9000 savings account-cash

Year 3: 16500 Roth IRA-investments, 10000 savings account-cash, 3500 taxable account-investments

Of course now if you have an emergency you should raid your savings account first, not your Roth IRA. But assuming you don't, that's how you should structure your savings.

This is extremely sensible and I think it manages the people who may have been talking past each other here. If you're continuously saving, you SHOULD use your Roth contributions. Keeping whatever portion of it that is designated for emergencies as cash. Then adjust it to savings as you build up an emergency fund in a savings account. Great breakdown, Jags.

FarmerPete

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Re: Roth IRA as Emergency Fund?
« Reply #29 on: December 30, 2014, 08:58:57 AM »
Exactly.  You don't use your emergency fund as your checking account. It is above and beyond your regular life expenses. Needing new tires because yours are bald isn't an emergency, it's an expense you plan for.  An emergency is a tree falls on your house and busts a hole in your roof.

I disagree.  A tree falling on your house is an insured event and meeting your insurance deductible is a forsen event, even if the time is unexpected.

I guess my thoughts on the EF are what are the biggest risks going on in your life right now?  Are you a house owner?  Do you rent?  Do you have a family?  How is your health?  Do you have good health insurance?  Do you have enough cash to cover your car, house, and medical deductibles? (Have at least enough for the most expensive, and hopefully enough for the top two).  If you are in a low risk/liability situation and your worst fear is losing your job, which you have no immediate cause for concerns, I'd absolutely put 100% of my EF in a Roth and invest it in a S&P or total market MF.

Jags4186

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Roth IRA as Emergency Fund?
« Reply #30 on: December 30, 2014, 09:04:01 AM »
Exactly.  You don't use your emergency fund as your checking account. It is above and beyond your regular life expenses. Needing new tires because yours are bald isn't an emergency, it's an expense you plan for.  An emergency is a tree falls on your house and busts a hole in your roof.

I disagree.  A tree falling on your house is an insured event and meeting your insurance deductible is a forsen event, even if the time is unexpected.

I guess my thoughts on the EF are what are the biggest risks going on in your life right now?  Are you a house owner?  Do you rent?  Do you have a family?  How is your health?  Do you have good health insurance?  Do you have enough cash to cover your car, house, and medical deductibles? (Have at least enough for the most expensive, and hopefully enough for the top two).  If you are in a low risk/liability situation and your worst fear is losing your job, which you have no immediate cause for concerns, I'd absolutely put 100% of my EF in a Roth and invest it in a S&P or total market MF.

Even insured events may require you to outlay money before being reimbursed. Anytime you need access to a significant amount of money is IMO an emergency.   Also just because something is insured doesn't mean you need to go through insurance. Easy example of this is if you got into a car accident you might be willing to pay more than your deductible out of pocket vs filing an insurance claim and having your rates increase.

FarmerPete

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Re: Roth IRA as Emergency Fund?
« Reply #31 on: December 30, 2014, 09:45:35 AM »
Exactly.  You don't use your emergency fund as your checking account. It is above and beyond your regular life expenses. Needing new tires because yours are bald isn't an emergency, it's an expense you plan for.  An emergency is a tree falls on your house and busts a hole in your roof.

I disagree.  A tree falling on your house is an insured event and meeting your insurance deductible is a forsen event, even if the time is unexpected.

I guess my thoughts on the EF are what are the biggest risks going on in your life right now?  Are you a house owner?  Do you rent?  Do you have a family?  How is your health?  Do you have good health insurance?  Do you have enough cash to cover your car, house, and medical deductibles? (Have at least enough for the most expensive, and hopefully enough for the top two).  If you are in a low risk/liability situation and your worst fear is losing your job, which you have no immediate cause for concerns, I'd absolutely put 100% of my EF in a Roth and invest it in a S&P or total market MF.

Even insured events may require you to outlay money before being reimbursed. Anytime you need access to a significant amount of money is IMO an emergency.   Also just because something is insured doesn't mean you need to go through insurance. Easy example of this is if you got into a car accident you might be willing to pay more than your deductible out of pocket vs filing an insurance claim and having your rates increase.

True, but simply having the insurance makes it not an emergency.  Typically, this is only a good plan if the cost of the repair is marginally higher than the deductible.  For example a $1000 repair on a $500 deductible.  I've found that if my rates get jacked up much after a claim, switching companies tends to remediate that.

Jags4186

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Re: Roth IRA as Emergency Fund?
« Reply #32 on: December 30, 2014, 09:59:31 AM »

True, but simply having the insurance makes it not an emergency.  Typically, this is only a good plan if the cost of the repair is marginally higher than the deductible.  For example a $1000 repair on a $500 deductible.  I've found that if my rates get jacked up much after a claim, switching companies tends to remediate that.

We're getting into semantics here.  Any time you need quick access to a significant amount of money is IMO an emergency.

Ask the people on the Jersey Shore who had their homes destroyed by Sandy if that was an emergency or not. Sure they may have gotten their FEMA insurance money, months later, what about the interim?

That said we are way off topic.

OP, put your cash in your Roth IRA. Worst case scenario you take it out and you're in no worse shape than if you never put it in to begin with. Best case you made a Roth IRA contribution you otherwise would have missed.

Gin1984

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Re: Roth IRA as Emergency Fund?
« Reply #33 on: December 30, 2014, 10:37:04 AM »

True, but simply having the insurance makes it not an emergency.  Typically, this is only a good plan if the cost of the repair is marginally higher than the deductible.  For example a $1000 repair on a $500 deductible.  I've found that if my rates get jacked up much after a claim, switching companies tends to remediate that.

We're getting into semantics here.  Any time you need quick access to a significant amount of money is IMO an emergency.

Ask the people on the Jersey Shore who had their homes destroyed by Sandy if that was an emergency or not. Sure they may have gotten their FEMA insurance money, months later, what about the interim?

That said we are way off topic.

OP, put your cash in your Roth IRA. Worst case scenario you take it out and you're in no worse shape than if you never put it in to begin with. Best case you made a Roth IRA contribution you otherwise would have missed.
Yes, I would classify that as an emergency and I normally only count loss of a job as an emergency.  I have a slush fund for my insurance, repairs etc.  It would take a lot (or at least what I consider a lot) to need to go into my EF.  So far, I have been lucky and not needed to.  So, for the 3 years that I have been saying the EF in the Roth instead of a taxable account, I've come out ahead.