The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Catica on June 15, 2019, 06:54:00 AM
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Is there something wrong with treating Roth IRA money as emergency fund?
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We have never actually used our Roths as an emergency fund but we do consider them back up emergency funds. We keep a few months expenses in an on-line savings account but if we ever needed more, our Roths are our back up plan.
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Here's a recent thread on the topic with helpful links and thoughts: https://forum.mrmoneymustache.com/ask-a-mustachian/roth-ira-contribution-and-emergency-fund/
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You can also put this into google for some more threads to read through:
"site:mrmoneymustache.com" roth emergency fund
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
The basic idea (as I view it) is that you only do this if you can't otherwise afford to fund all available tax advantaged accounts. Best case: no emergency and you have more in tax advantaged accounts. Worst case: emergency and you have the same in tax advantaged accounts as if you hadn't funded the Roth in the first place.
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Here's a recent thread on the topic with helpful links and thoughts: https://forum.mrmoneymustache.com/ask-a-mustachian/roth-ira-contribution-and-emergency-fund/
thanks!
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
I didn't know that I had to replace that money. I thought I was free to take out what I put in but not the interest.
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
I didn't know that I had to replace that money. I thought I was free to take out what I put in but not the interest.
You do not and cannot put back money you have withdrawn. There is no loan from an IRA. There might be a loan option from a 401k, at the discretion of your plan. But then there will be a payment plan to put it back, and it is immediately due if you quit your job, or it is counted as a nonqualified withdrawal.
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
I didn't know that I had to replace that money. I thought I was free to take out what I put in but not the interest.
You do not and cannot put back money you have withdrawn. There is no loan from an IRA. There might be a loan option from a 401k, at the discretion of your plan. But then there will be a payment plan to put it back, and it is immediately due if you quit your job, or it is counted as a nonqualified withdrawal.
Thanks. I wouldn't intend to replace it. It was Rob_bob's comment that confused it me. Made me believe that I had to do that.
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
I didn't know that I had to replace that money. I thought I was free to take out what I put in but not the interest.
You do not and cannot put back money you have withdrawn. There is no loan from an IRA. There might be a loan option from a 401k, at the discretion of your plan. But then there will be a payment plan to put it back, and it is immediately due if you quit your job, or it is counted as a nonqualified withdrawal.
Technically, if you got it back in with 60 days you could do that and call it a rollover. You're limited to 1 such indirect rollover (where you have your hands on the cash) per year. This rule was added a year or two ago to stop people for taking such "loans" from their IRA repeatedly such that they never really completed the rollover.
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
I didn't know that I had to replace that money. I thought I was free to take out what I put in but not the interest.
You do not and cannot put back money you have withdrawn. There is no loan from an IRA. There might be a loan option from a 401k, at the discretion of your plan. But then there will be a payment plan to put it back, and it is immediately due if you quit your job, or it is counted as a nonqualified withdrawal.
Thanks. I wouldn't intend to replace it. It was Rob_bob's comment that confused it me. Made me believe that I had to do that.
I wasn't thinking that you would fund a Roth purely as an emergency fund since my Roth is for retirement so I want max $$ in it.
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If you pull money out for an emergency then how do you replace that withdrawal? Your yearly contributions are limited. Or can you take out a loan on a Roth? That is something I have never thought about.
I didn't know that I had to replace that money. I thought I was free to take out what I put in but not the interest.
You do not and cannot put back money you have withdrawn. There is no loan from an IRA. There might be a loan option from a 401k, at the discretion of your plan. But then there will be a payment plan to put it back, and it is immediately due if you quit your job, or it is counted as a nonqualified withdrawal.
Thanks. I wouldn't intend to replace it. It was Rob_bob's comment that confused it me. Made me believe that I had to do that.
I wasn't thinking that you would fund a Roth purely as an emergency fund since my Roth is for retirement so I want max $$ in it.
There seems to be some confusion here. A Roth IRA is just a 'vehicle' or 'bucket' for your money, and it happens to have tax-favorable conditions. Inside your Roth you can invest in almost anything you'd like, from holding cash to bonds, index funds, individual stocks, precious metals, foreign currency or REITs. One school of thought is that if you plan on relying on savings within your Roth as your emergency fund you should have that money invested in cash-equivalent investments.
A person can take out contributions at any time, penalty free, for whatever reason because you've already pay taxes on those contributions. Once per year you can take contributions out of your Roth and put them back within 60 days - this can be one strategy for meeting a sudden, unexpected expense. One could also just take out contributions and not replace them, declaring the distribution on their taxes and losing out on future tax-free growth of that money.