Author Topic: Should I move my emergency fund into an IRA?  (Read 1082 times)

EconDiva

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Should I move my emergency fund into an IRA?
« on: March 03, 2018, 02:50:37 PM »
Now that I've got ~6 months in my EF I am now beginning to wonder if I should move the funds into a different account.

It's currently in a Capital One 360 account and it just recently started bothering me that it's sitting in a place only earning 1%. 

I'm approaching 15K so maybe I could move the 5500 to an IRA for 2018 but where to keep the rest? 

FlorenG

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Re: Should I move my emergency fund into an IRA?
« Reply #1 on: March 03, 2018, 04:14:37 PM »
Hi EconDiva!

I know it is not much of an improvement, but you can find money markets giving you ~1.5% right now and FDIC protected to over $100K.

If you are willing to take a little risk, there are conservative, low-cost index funds you might want to check out: VSCGX and VWINX to mention a couple.

Hope this helps!

          Floren


COEE

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Re: Should I move my emergency fund into an IRA?
« Reply #2 on: March 03, 2018, 05:08:33 PM »
Series I bonds - https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

I have my extended emergency fund there (about 3-6 months of expenses).  Currently returning like 2.58%, and the rate adjusts biannually to match inflation.  There's a bit to them - so read the link carefully before investing in these.  You don't have access to the money for 1 year after purchase (though you can purchase near the end of the month reducing this to effectively 11 months.  Because of this you'll probably want to ladder your purchases somewhat.

I started laddering iBonds after I was unemployed for 6 months and never touched my emergency fund.

I also consider my iBonds to be part of my bond allocation, enabling me to buy more stocks in my retirement accounts.  with the downside that if I ever do have to use my iBonds I will might have to sell some stocks to maintain my AA, though I might not actually do that - I'll see what my big picture looks like at the time - if it ever comes to that.  After not using my emergency fund after 6 months of unemployment, I'm not convinced I'll ever need my extended emergency fund.  Hence the reason I decided to put my extended emergency fund in iBonds.

Sibley

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Re: Should I move my emergency fund into an IRA?
« Reply #3 on: March 03, 2018, 05:34:29 PM »
Don't move it anywhere you can't access it without penalty. An IRA, by definition, is not that.

Slow2FIRE

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Re: Should I move my emergency fund into an IRA?
« Reply #4 on: March 03, 2018, 06:03:43 PM »
Our personal plan, which more conservative people may vehemently oppose, was that we had a fully funded 3 month savings account emergency fund until our Taxable brokerage savings hit 12 months of expenses and then we started to decrease the savings account cash to only 1 month expenses cash on hand.  Our idea is that we could survive with the equivalent of 7 months in a bad situation that isn't a true black swan event (expectation of 50% loss of value in Taxable during worst case dual job loss emergency scenario).  Furthermore, medical emergencies will be covered by our HSA accounts as much as possible.

We decided we are willing to take the risk for better growth of assets because if it is a "true emergency" than we have to pull down the cash by selling stocks and we likely avoid any capital gains tax with such a large loss.  We'll also pull the principal out from our Roth IRAs also if needed.

If we keep more cash in savings, we get less long term growth - which was okay when we had less assets (even if that sounds backwards).

BTW - we now have more than 12 months of expenses in our Taxable account at this point so we don't even think about it anymore really.

MountainTown

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Re: Should I move my emergency fund into an IRA?
« Reply #5 on: March 03, 2018, 06:16:01 PM »
I don't think it's a bad idea to put 5500 in a Roth. I did this and my reasons are this: a.) It's not all of your e-fund. I would still make sure you have non-ira, non-investment cash in your pocket or house b.) contributions can be accessed with no penalty/no tax c.) whether you put it in investments or not is still up to you(in the ira) but regardless you will have saved money on taxes and also have the option to invest it better or more aggressively as your situation improves. d.) you can't claw back IRA money. I have years wasted where I could have put the money in there. Wish I would have....I never had an emergency. And if I did, it would have been accessible within 5 days.

Looking back: I'm glad I have always kept an e-fund don't get me wrong. That being said, I never ever used it. Other people might have a need and I obviously just got lucky...but just saying my experience. And even if I did have an emergency I surely wouldn't have needed it all(most likely) so that's why I think putting  a portion of it in a Roth doesn't make sense.

I currently put my savings in traditional ira's but that's because I still have too much cash on hand. When I was just building up, I used a Roth because it is much more accessible than a Traditional IRA and nice to know that you won't have tax hit.

terran

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Re: Should I move my emergency fund into an IRA?
« Reply #6 on: March 03, 2018, 09:23:52 PM »
If you can't otherwise max out all of your tax advantaged space, then moving your emergency fund to a Roth IRA is not a bad idea at all. The basic thinking goes that you were going to "lose" that available tax advantaged space anyway, so you may as well put your emergency fund there since best case scenario you never actually need to use your emergency fund, and eventually maybe you will be able to max out your tax advantaged accounts and replenish your taxable emergency fund. In this case you end up with more in your tax advantaged accounts than if you hadn't done it. Worst case scenario you do need your emergency fund, you can always withdraw contributions from Roth, and you're no worse off than if you'd never contributed. In this case you've spent your emergency fund and have the same amount in your tax advantaged accounts as if you hadn't put your emergency fund in your Roth IRA.

That answers the question you asked in the thread title, but you go on to talk about getting a better than 1% return, which is an entirely different question of whether you should invest your emergency fund. You can invest either in or out of an IRA, and you can hold low risk "cash" like assets in or out of an IRA. In fact, in terms of tax efficiency, holding the investments outside the IRA and the cash like (interest bearing) assets inside the ira could even work out better given how interest and capital gains are each taxed. Anyway, you should not invest your emergency fund as that defeats the purpose of an emergency fund. You may at some point decide that you have access to enough assets that you don't need an emergency fund because even in a large market downturn you'll have enough to be ok, but until then don't invest your emergency fund.

If you decide to put your emergency fund in a Roth IRA so you don't lose the tax advantaged space, but not invest it so you still have a viable emergency fund, then you might decide to open an IRA at an online bank where you can keep the assets in a savings account or CD. Ally would be a good option: https://www.ally.com/bank/ira/ira-account/. Bonds would also be a fine option if you'd rather have your IRA at somewhere like Vanguard.