Saving for a car with Roth IRA

[stoic0515]

I am a newbie to investing. My husband and I are mid-twenties, own our house and cars outright and are trying to figure out the best investment plan for our future. We live far below our means and have about $60,000 sitting in the bank and we are dabbling with different ways of investing. I've been doing research and found out that you can withdraw your initial contributions from your Roth IRA without penalty at any time. My question is this- we have about $15,000 sitting in the bank that we are saving to purchase a car in a couple of years. Instead of just keeping this money in a savings account in the bank would it be wise to invest this in our Roth IRA (I know there is a max $11,000/yr contribution limit)? This way we can just pull the money out of the Roth (or initial contribution) and the money has hopefully made additional money for our retirement in the time being. What would be the downsides of this?

[jexy103]

The biggest downside is the limited amount of contributions you and your husband are allowed to make each year. So, if you are sitting on a pile of cash, you can each contribution $5,500 to your 2013 Roth IRA before April 15, 2014. And you can put in another $5,500 each for 2014 before April 15, 2015. That's $22,000 sitting in your Roth IRA invested which can sit there and earn money and can be withdrawn tax-free whenever you need the money. Say you pull it out to buy a car. Yes, you've earned tax free gains on $11,000-$22,000 for about two years, which isn't much in the grand scheme of things. Or, you can leave it in the Roth IRA and allow it to earn for 10+ years, which will be more significant, especially if you continue to contribute to your IRAs.

The biggest downside to your plan is that you cannot put the money back in! Each year, you are limited to $5,500 (may go up in the future, but not by much). So if you put in $5,500 each in 2013 and 2014, then pull all $22,000 in 2015 leaving only the gains, you can only put about $5,500 back in for 2015. You've put money into a retirement account to save for a car, withdrawn the amount for the car, and then you can never put that money back in because of the annual limits.

I think if you were going to spend that money on a car regardless of whether it is in a savings account or an IRA, sure, put it in your Roth IRA and withdraw your contributions. You would have the advantages of earning tax-free gains. However, realize the effect that this will have on your retirement plans, if that is something you are starting to plan for. The ideal plan (if you have enough cash for it), is to put $5,500 into each of your Roth IRAs for 2013 now (before April 15), save for a car in a savings account, while also setting aside another $5,500 each for 2014 IRA contributions.

[Bruno]

we have about $15,000 sitting in the bank that we are saving to purchase a car in a couple of years.

That is already enough for a couple of cars. No need to put that into a Roth then. Rather save the money that collects from now on and put that into the Roth IRA - and keep it there.

In general it only makes sense to pull money out of a Roth IRA if the after tax return on that money beats the return of the Roth.

[Weedy Acres]

My concern is that you aren't maxing out your tax-sheltered retirement savings yet you're planning to buy a $20,000 car.  I think your priorities are backwards.  I wouldn't be considering spending anywhere near that much on a car unless I had so much in investments that the car expense was a blip in my net worth.

[Cromacster]

No, I would not do it.

If you put money in a Roth, leave it in there as long as you can, because once you take it out you can't get it back in.

It sounds like you have lots of cash just sitting around doing nothing.  I would recommend doing some reading about long term investing to find out how to make your money work for you.

And....if you follow MMM at all the 15,000 you have saved is plenty for TWO cars, fancypants!

[zurich78]

If you own your house and your current cars outright, then you should be able to make your Roth IRA contributions and easily save enough money to purchase the cars with cash.

(Although, even if I had the cash to buy cars, I'd still finance them and then pay off the loans but that's just me).

Also, if you're in your late 20s, I've heard that a $5,500 contribution in your 20s, would be worth $30K when you're eligible to withdraw at 60.  So if that's true, then you're preventing yourself from taking advantage of an opportunity to turn $5k in to $30k for no real reason (since, as others have pointed out, you can't put that Roth IRA withdrawal BACK in).

[samburger]

A Roth IRA is not a short-term investment vehicle. Investments very often lose value in the short term. That's why investing should only be a long-term strategy.

I put $11,000 in my IRA for 2013 a couple months. My holdings have lost about $300 since then. If I withdrew the principle now to, say, buy a car, I'd be out that $300--AND, as others have pointed out, I'd have lost my opportunity to grow that 11k into 30k.

Forget making money in the short term. That's what your job is for. Develop a long-term investment strategy and do something with that $60,000 you have laying around.

[rescuedog]

I agree with the above comments, Roth IRAs are not a short term investment vehicle and you can never put that money back.

We use our Roths as an absolute last resort emergency fund.  Meaning we've both last our jobs and we've used up all the immediate savings and we've sold the house and live in a tent.  So realllly a dire situation.

I would advise against that plan you mentioned!

[TomTX]

$60k in the bank? $8k is plenty for a good, non-fancy used car.

What the heck are your annual expenses? Unless you have erratic jobs, 6 months of expenses is plenty for an emergency fund.

Put $11k in Roths before April 15. Be sure to designate the contribution is for the 2013 tax year.
Put $11k in Roths on April 16th.

...and if you don't have enough for 6 months of expenses + $8k for a replacement car you can save up the difference in the next couple of years

[Guizmo]

I thought you were allowed to return the contribution that you withdrew as long as you did so during that year.

[FastStache]

I thought you were allowed to return the contribution that you withdrew as long as you did so during that year.

I believe it is 60 days.