Keep my emergency fund in my Roth IRA?

[realityinabox]

Greetings all,

I am new to the MMM forum, and movement in general.  I come from the land of Dave Ramsey, where he encourages people to keep 3-6 months worth of expenses in an emergency fund.  I currently have ~30k in a Vanguard Roth targeted retirement fund (2055), and roughly $11k sitting in my credit union account (earning 3% annually), most of which is earmarked as emergency fund in my budgeting software. 
 
Is it crazy to have that much money sitting in my checking account when, with a Roth IRA, I can pull the principle out at no penalty anyway?  I obviously want to keep some liquidity, but I haven't maxed out my Roth contributions for 2013 yet, so it got me thinking, why not keep my emergency fund in a higher yield account?

Any input would be great, as I said, I'm relatively new to all this.

[chicagomeg]

Yes do it.

www.bogleheads.org/forum/viewtopic.php?f=1&t=129279

[realityinabox]

Would it be a bad idea to put this money into my targeted retirement fund?  Or should I keep it in a money-market?

[Another Reader]

You can pull contributions out of a Roth, but you cannot put them back.  Therefore, you lose all of the future benefits of growth and compounding.  This is a very stupid idea in my opinion. 

An emergency fund is just that, money immediately available for emergencies.  Unexpected car repairs (or covering the deductible if a car is totaled and you need a replacement), multiple hospital co-pays if you need medical care, emergency plane trips to see sick family members, and the like.  Things you cannot cash flow and would require you to use a credit card you can't pay off immediately or where credit cards are not an option. 

Many people agree that three to six months of expenses should be part of your emergency fund in the event of a job loss.  You may not qualify for unemployment insurance, the payment may be delayed, or you may run out of unemployment before you find a new job.  As someone that is much older than many of the posters here, I can tell you that you WILL have an emergency at some point in your life. 

If you are earning 3 percent on those funds, you are doing well.  No need to risk money in the market or destroy the compounding effect if you can have emergency cash that does not lose purchasing power.   Whether you need $11,000 in that account is up to you and your risk tolerance.

[Vitai Slade]

I disagree with "Another Reader".

If you have not maxed out your Roth yet, then there would be no "future benefits of growth and compounding" that were lost by pulling those same funds out because the money would never have entered the account in the first place! You can only lose the "future benefits of growth and compounding" if you are talking about past years contributions that you want to pull out that were ALREADY in the account. You have a time limit and an amount limit to what funds you can put in. Once that expires, it is gone forever. After you max out your accounts, THEN you can build your outside e-fund again.

I currently am using my ROTH as my e-fund temporarily while I build up my finances. The reason for this is that I can only put in a certain amount to that ROTH each year and I want to put in the maximum amount I can to get the maximum tax advantage after growth. Once my own finances exceed my 401k max and my ROTH max (should happen this year) I will start saving outside of that and be contributing to probably a taxable account which will then act as my primary e-fund along with a few thousand in my 'vacation money' account. My ROTHs will then become a 'backup' e-fund.

[realityinabox]

Vitai, do you keep the emergency fund money in stocks/bonds like the rest of your roth, or do you keep in separate in a money market, etc? 

The other factor is that I am a student, so I am not sure whether I will be able to max my 2014 contribution.  I graduate in a year and a half, so I am leaning towards maxing my contributions for 2013 and contributing as much as I can spare in 2014 while keeping a portion of those contributions in something safe within the roth so that when I graduate and start making real money (I'm an engineering student with good grades and work experience, so I'm not too worried about not finding employment of some sort), I can rebuild my cash e-fund and move the e-fund in the roth into stocks/bonds.  Does that seem too conservative?

[Vitai Slade]

My situation is going to be different than yours based on my risk tolerance. I am currently full force on REITs in my ROTH and an REIT Index Fund (just maxed out and acquired yesterday for 2014 tax year).

I hold a big position in an S&P 500 Index fund as well and will be putting my taxable account holdings into an extended market index fund. I am creating a very aggressive portfolio (by many people's standards). Don't forget though that a ROTH is just a container to hold different funds. You can put your entire contribution to your ROTH into a money market fund and it will be very stable. Max out your ROTH every year until you have maxed it out and have a surplus. Once you have enough surplus to create an external emergency fund to your comfort level, then diversify and invest those funds.

Take a look at the link mlipps gave you. It has plenty of explanations there.

[Vitai Slade]

Honestly, I don't have a need for an emergency fund. I find it to be a waste of idle dollars. I hated the fact that I had even $5,500  just sitting in a money market account waiting for 2014 to roll around. As soon as the new year hit, I contributed immediately the full amount. Now I have $2 in the account (from interest) where the $5,500 was.

To me, an emergency is a SERIOUS emergency. Like job loss or a financial CATASTROPHE of some sort. Car repair? No. Plumbing issue in the house? Not really. All of those big expenses can be handled through my monthly cash flow excess. Instead of saving for those months, they go to pay for the "big expense". That's part of the joy of living so far below my means. The only emergency would happen when the cash flow suddenly stopped (aka job loss). In that case, yes, the Roth would probably be raided. But only after all other options were vanquished. And only long enough till I found another job... then that money would go right back in the ROTH.

Look at the MMM post 'Springy debt vs. Cash Cusion': http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/