Author Topic: Should I park Emergency and FU money in a ROTH IRA?  (Read 4678 times)

daveydinner

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Should I park Emergency and FU money in a ROTH IRA?
« on: July 01, 2014, 10:12:50 AM »
Since it's relatively easy to deposit and withdraw principle to my TD Roth IRA, should I park all or most of my FU and emergency shash into it instead of checking/savings?

-Stubble in 'Cisky

Frugal Father

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #1 on: July 01, 2014, 10:25:16 AM »
I'm in the middle of this debate as well as we're just finishing up our Emergency Fund ($10k). I'm debating whether to put it in our roth IRA or just throw it into a high-interest (~1%) savings account. I think the important question is the importance of peace of mind. There's always the investment risk that the value will drop right when you need to pull it out, but that money could also be working harder for you. I have a feeling we'll ultimately decide on the savings account just for my wife's sanity. Or maybe we'll split it 50/50.

Cheddar Stacker

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #2 on: July 01, 2014, 10:28:04 AM »
Pros:
1) Potentially higher return.
2) Tax free earnings.
Cons:
1) Potentially lower (negative) return.
2) Withdrawal of funds permanently "wastes" the $5,500 annual contribution limit.

Some people really, really advocate against it because of that 2nd con. You have a limited window/amount to contribute each year, and some see that as sacred.

I say if you like to take risks, do it. If you like to play it safe, don't even think about it.

surfhb

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #3 on: July 01, 2014, 10:31:34 AM »
I would personally keep my ER fund in a regular saving account.   It all depends on much you have saved.  For example, if you have $300k working for you and you're still putting money away into a ROTH, a paltry $10,000 isn't going to make that much difference.    It's for an emergency only!  Remember?  :)

rpr

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #4 on: July 01, 2014, 10:34:08 AM »

Pros:
1) Potentially higher return.
2) Tax free earnings.
Cons:
1) Potentially lower (negative) return.
2) Withdrawal of funds permanently "wastes" the $5,500 annual contribution limit.

Some people really, really advocate against it because of that 2nd con. You have a limited window/amount to contribute each year, and some see that as sacred.

I say if you like to take risks, do it. If you like to play it safe, don't even think about it.
CS --
The first pro and the first con have nothing to do with the IRA. You can go ahead and put your emergency fund into stocks in order to get the higher return with higher risk.

rpr

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #5 on: July 01, 2014, 10:37:18 AM »
If you are just starting out and have no savings of any kind, then putting your  EF into a Roth IRA is possible. Just make sure that it is invested conservatively since you need the safety of the principal rather than return.

Jack

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #6 on: July 01, 2014, 10:48:11 AM »
The first pro and the first con have nothing to do with the IRA. You can go ahead and put your emergency fund into stocks in order to get the higher return with higher risk.

I was just about to say the same thing. There are really four possibilities for the emergency fund:

  • Risky investment in a Roth IRA
  • Safe investment in a Roth IRA
  • Risky investment in a taxable account
  • Safe investment in a taxable account

I'm currently going with option #3.

I would say that if funding an emergency fund would cause you not to be able to afford to contribute to your IRA, then go ahead and consider your IRA to be an emergency fund. But once you have enough money to contribute to both, stop considering the IRA as eligible for emergency withdrawal (and change the investments to more aggressive ones if you followed rpr's advice initially).

Cheddar Stacker

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #7 on: July 01, 2014, 11:10:18 AM »
The first pro and the first con have nothing to do with the IRA. You can go ahead and put your emergency fund into stocks in order to get the higher return with higher risk.

I was just about to say the same thing. There are really four possibilities for the emergency fund:

  • Risky investment in a Roth IRA
  • Safe investment in a Roth IRA
  • Risky investment in a taxable account
  • Safe investment in a taxable account

I'm currently going with option #3.

I would say that if funding an emergency fund would cause you not to be able to afford to contribute to your IRA, then go ahead and consider your IRA to be an emergency fund. But once you have enough money to contribute to both, stop considering the IRA as eligible for emergency withdrawal (and change the investments to more aggressive ones if you followed rpr's advice initially).

Agreed, the risk is not exclusive to an IRA. I was trying to get the point across that investing the EF carries risk.

I'm currently going with a high interest checking account (1.85%) so I guess that would be Jack's option #4. Mine is less of an EF though and more seed money for future real estate investments.

Emilyngh

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #8 on: July 01, 2014, 11:37:45 AM »
We have about $10k in cash for projects, repairs, and maintenance that has a decent chance of coming up.

We then have $30k in a Roth, in the market, but accessible if we have something super expensive.   I'm hoping to not ever need this, but having it helps me sleep at night. 

We have everything else in retirement accounts, where we can't pull without penalties until we start transferring to the Roth through a Roth pipeline.

Frugal Father

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #9 on: July 01, 2014, 11:42:36 AM »
The first pro and the first con have nothing to do with the IRA. You can go ahead and put your emergency fund into stocks in order to get the higher return with higher risk.

I was just about to say the same thing. There are really four possibilities for the emergency fund:

  • Risky investment in a Roth IRA
  • Safe investment in a Roth IRA
  • Risky investment in a taxable account
  • Safe investment in a taxable account

I'm currently going with option #3.

I would say that if funding an emergency fund would cause you not to be able to afford to contribute to your IRA, then go ahead and consider your IRA to be an emergency fund. But once you have enough money to contribute to both, stop considering the IRA as eligible for emergency withdrawal (and change the investments to more aggressive ones if you followed rpr's advice initially).

Agreed, the risk is not exclusive to an IRA. I was trying to get the point across that investing the EF carries risk.

I'm currently going with a high interest checking account (1.85%) so I guess that would be Jack's option #4. Mine is less of an EF though and more seed money for future real estate investments.
Where did you manage a 1.85% checking account?

Cheddar Stacker

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #10 on: July 01, 2014, 11:57:35 AM »
Where did you manage a 1.85% checking account?

There are a lot of them around. Try a local small bank or a credit union. Others have posted about online banks with similar rates. It actually tracks at prime minus x% and when I opened it 6-7 years ago it paid 5.45%.

You typically have to do a few things to earn these rates:

1) Receive a direct deposit at least once a month.
2) Generate 10-15 debit card transactions during the month.
3) Receive your bank statements electronically.

They pay the high interest on a pre-determined balance (mine is the first $25K in the account) then anything over that gets the crappy bank rates.

slugline

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #11 on: July 01, 2014, 12:23:20 PM »
I would personally keep my ER fund in a regular saving account.   It all depends on much you have saved.  For example, if you have $300k working for you and you're still putting money away into a ROTH, a paltry $10,000 isn't going to make that much difference.    It's for an emergency only!  Remember?  :)

I'm in this camp too. In my view a classic purpose of an emergency fund is to be on standby to pay living expenses if you're laid off the job for a few months or so. If you're fretting about lost gains, I'd take it as a sign that your emergency fund might be too big, and the excess should be moved to an investment account with a longer time horizon.

Catbert

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #12 on: July 01, 2014, 12:34:19 PM »
In part it depends on what kind of things count as "emergencies."  If "emergencies" are things that happen annually or more frequently then keeping it in a Roth won't do any good.  (There are people for whom every car repair, dental problem or broken appliance are emergencies.)  If realistically you may never need to use your emergency fund than a Roth is a great place to keep it.

If you are well on your way to FI then keeping your emergency fund in a Roth while you build up assets outside retirement funds is do-able also.

Brian Fellows

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #13 on: July 01, 2014, 12:49:45 PM »
I look at your situation this way.  You want to be able to max a Roth IRA every year if possible.  If you put your emergency fund in your Roth IRA, and then you have to take that money out, you missed out on that contribution for the year.

But if you have to pick emergency fund OR Roth IRA for the year, it would make sense to put it in the Roth.  That way if you don't need it that year, you didn't miss out on contributing.  However I would still try to get to the point where I had an emergency fund separate from my Roth IRA, so there's never a chance of burning up retirement money that's supposed to be sitting there compounding.  When you're just starting out and don't have enough money to have both, it's probably better to make sure you get something in your Roth and just hope you never have to touch it.

Frugal Father

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #14 on: July 01, 2014, 01:15:48 PM »
Where did you manage a 1.85% checking account?

There are a lot of them around. Try a local small bank or a credit union. Others have posted about online banks with similar rates. It actually tracks at prime minus x% and when I opened it 6-7 years ago it paid 5.45%.

You typically have to do a few things to earn these rates:

1) Receive a direct deposit at least once a month.
2) Generate 10-15 debit card transactions during the month.
3) Receive your bank statements electronically.

They pay the high interest on a pre-determined balance (mine is the first $25K in the account) then anything over that gets the crappy bank rates.
Do you use your checking account as both your Emergency Fund AND your normal account that you pay out of? Since we pay for basically everything by CC, I'm not sure where I would come up with 10-15 debit transactions each month. (Why do they even have this requirement???)

Cheddar Stacker

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Re: Should I park Emergency and FU money in a ROTH IRA?
« Reply #15 on: July 01, 2014, 01:28:32 PM »
Where did you manage a 1.85% checking account?

There are a lot of them around. Try a local small bank or a credit union. Others have posted about online banks with similar rates. It actually tracks at prime minus x% and when I opened it 6-7 years ago it paid 5.45%.

You typically have to do a few things to earn these rates:

1) Receive a direct deposit at least once a month.
2) Generate 10-15 debit card transactions during the month.
3) Receive your bank statements electronically.

They pay the high interest on a pre-determined balance (mine is the first $25K in the account) then anything over that gets the crappy bank rates.
Do you use your checking account as both your Emergency Fund AND your normal account that you pay out of? Since we pay for basically everything by CC, I'm not sure where I would come up with 10-15 debit transactions each month. (Why do they even have this requirement???)

Yes. My EF is my checking account because of the high interest rate.

They require these transactions because they earn fees which help contribute to the 1.85% they pay in interest. I, and others that use these types of accounts, tend to make small purchases via debit (think a 6 pack of beer, or a quick trip to pick up eggs or something) and make large purchases with credit to get the bigger bang out of the cash back from CC rewards. It's not hard to make a small purchase every other day between my wife and I to earn this interest.

OP - sorry for the derailment, but hopefully this info is helpful to someone.