Anyone w/draw from Roth for Emergency Use?

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Anyone w/draw from Roth for Emergency Use?

Postby alpenglow » Wed Feb 20, 2013 12:11 pm

I was wondering if anyone here has tapped their Roth IRA for an emergency use. As I understand it, you can withdraw contributions penalty free and you would complete IRS Form 8606 Part III. We have 6 months expenses in a taxable emergency fund but lack additional funds to contribute to a Roth IRA this year (we are maxing out both 403b and 457 to save $70000!). It seems like a no-brainer to contribute to the Roth from the emergency fund and allocate the contribution to a short term bond fund to preserve the Roth space for the future (and to earn pitiful interest tax free). There would still be plenty of additional funds remaining in an FDIC insured savings account. As for Roth vs 403b/457, we prioritize those since we are in a high tax state (NY) and plan to retire to a low/no tax state (NH). Thanks.
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Re: Anyone w/draw from Roth for Emergency Use?

Postby porcupine » Wed Feb 20, 2013 2:04 pm

epimedium wrote:I was wondering if anyone here has tapped their Roth IRA for an emergency use. As I understand it, you can withdraw contributions penalty free and you would complete IRS Form 8606 Part III. We have 6 months expenses in a taxable emergency fund but lack additional funds to contribute to a Roth IRA this year (we are maxing out both 403b and 457 to save $70000!). It seems like a no-brainer to contribute to the Roth from the emergency fund and allocate the contribution to a short term bond fund to preserve the Roth space for the future (and to earn pitiful interest tax free). There would still be plenty of additional funds remaining in an FDIC insured savings account. As for Roth vs 403b/457, we prioritize those since we are in a high tax state (NY) and plan to retire to a low/no tax state (NH). Thanks.

Not going into the off-topic sidebars re: 403b, 457, the $70,000, etc. :-)

If the question is whether to move emergency funds to Roth IRA to ensure that you can contribute to the Roth for 2012, I would say go for it. If it is for 2013, I would suggest you wait until 04/2014 (or to the time when you have an emergency fund plus some left over to put into the Roth, whichever is earlier).

- Porcupine
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Re: Anyone w/draw from Roth for Emergency Use?

Postby ThePrune » Wed Feb 20, 2013 6:25 pm

Yes, I set up Roth IRAs starting in 2006 for myself and my wife that were specifically for our after-tax emergency funds. We contributed after-tax dollars from our existing bank emergency fund. My primary motication was to save on taxes, since we were in the 30% combined state + federal tax bracket at the time. (We have separate Roth accounts for conversions from tIRA money).

I had not needed to tap any of this money until last year (2012). Since we are pre- 59 1/2, the distributions were non-qualified. But since we withdrew much less than our contribution basis, Form 8606 was a snap to fill in (at least compared to previous years in which we had coverted tIRAs with a cost basis). As expected, Form 8606 showed we owed no penalty on the withdrawal.
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Re: Anyone w/draw from Roth for Emergency Use?

Postby WHL » Fri Feb 22, 2013 3:32 am

I've never been in a situation where I haven't had the money to fully fund my Roth IRA. I can see using the e-fund to make your Roth contribution if you had no other choice.

I can confidently say that I will never remove money from my IRA's or 401k's for non-retirement purposes.
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Re: Anyone w/draw from Roth for Emergency Use?

Postby Scott S » Fri Feb 22, 2013 5:21 pm

I haven't yet needed to withdraw from my Roth for emergencies, but I agree that you ought to utilize the space for something.
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Re: Anyone w/draw from Roth for Emergency Use?

Postby Padlin » Fri Feb 22, 2013 11:20 pm

We put some of our EF $ into Roths when We could not fully fund them otherwise. Seems to be a better place then a CD especially when I can foresee no real need to have immediate access to the $. In a real emergency, which I've never had, knock on wood, it's liquid and safe enough for my needs.
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Re: Anyone w/draw from Roth for Emergency Use?

Postby ofcmetz » Fri Feb 22, 2013 11:35 pm

A good friend at work had some health issues and hit his ROTH for about 30K due to medical expenses and some lost pay. He left all the interest and capital gains in the account and paid no taxes. It really reminded me about how practical ROTH accounts can be. Currently one of our ROTH's is in a bond index fund and would act as a backup should we completely tap our emergency fund of cash at the local credit union. I would definitely fund my ROTH with an emergency fund, but would keep it in something conservative like a short term bond fund, money market, or CD.
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