Ok, so the principal can be taken out without penalty. Good to know. What do you mean by "you can never put it back in"? Like, for that year? Say in January I contributed $1000. In March, I withdraw $500. Can I not contribute more during the rest of the year?
I'm not a veteran poster on this forum, but I am a veteran Roth investor, so I wanted to help clarify the Roth issues. As was already said, you can take principle out at any time without any taxes or fees. The 5 year rule only applies to earnings, not principle. The issue that Cromacster is referring to mostly is an issue with higher amounts than the $1000 you are talking about. You are correct that you could replace the $500 in your example. But if you are tapping your emergency fund to cover 9 months of unemployment so you pull $22k from your Roth, it will take you 4 years to replace the money since there is an annual $5500 contribution limit. The power of the Roth is in having a big principle getting you tax free earnings, but it takes time to build that big principle, so that's why so many people are saying they'd be reluctant to deplete it to deal with an emergency.
As far as where to keep the emergency fund, I guess it depends on the emergency. I doubt many people on here worry much about "funds" for those $500-$1000 emergencies since when you are LBYM it's easy enough to divert money temporarily (by delaying an investment deposit or using a CC and then paying off before there is any interest) to cover this stuff and then get back on track. If you are talking about funds to cover expenses in the case of job loss or other larger emergencies, it makes me really nervous to depend on money that is in the market for stuff like that. If I lose my job during a market crash, I don't want to be forced to sell low to meet expenses.
Of course, everyone's situation is different. When my wife and I were both working at very secure jobs and living off only one of the incomes, I had no emergency fund for covering job loss and slept just fine at night. I knew the odds of both of us losing our jobs simultaneously was miniscule so I was more than happy to take on the risk of selling at a loss. Now that she is staying at home and replacing my job would likely require relocating, I want 9 months of expenses in CD's and cash and am willing to take low returns on that money in exchange for the security.