Roth IRA emergency fund question

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Roth IRA emergency fund question

Postby djlevy » Fri Mar 15, 2013 11:31 am

I have a question about using my Roth IRA as an emergency fund. Both my wife and I currently have Roth IRA's (combined upper 5 figure balance) in the Vanguard LifeStrategy Growth Funds. We currently don't really have an emergency fund and have not been contributing to to the Roth for the last several years.

We are now able to begin building savings again and the idea of using the Roth as our emergency fund is appealing. My question comes down to this: If our plan is to use the Roth as our emergency fund is there any reason not to put it in the LifeStrategy Fund?

I should note that the current balance is not available for withdrawal as several years ago we withdrew our contributions inorder to refinance our house out of an interest-only loan and are now at a 30 year fixes around 3.5%.
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Re: Roth IRA emergency fund question

Postby Twins Fan » Fri Mar 15, 2013 6:30 pm

So, the entire Roth balance is earnings, as in anything taken out of it would be penalized?

I would consider that strictly a retirement account at this point, and start building up an emergency fund in a plain old savings account.
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Re: Roth IRA emergency fund question

Postby grabiner » Sat Mar 16, 2013 8:45 pm

Unless you would lose an employer match, you should reduce your 401(k) contributions to max out your Roth IRA contributions, so that you can put more in the Roth IRA to use as an emergency fund later.

And wherever you keep your emergency fund, that amount should be considered separate from your retirement investments. If you have an emergency fund in the Roth IRA, put that in something very low-risk such as Short-Term Bond Index or Short-Term Inflation-Protected Securities, and then continue to invest your retirment funds 80% in stock (LifeStrategy Growth) if that is appropriate.
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Re: Roth IRA emergency fund question

Postby livesoft » Sat Mar 16, 2013 9:35 pm

I would use another financial institution for the new Roth contributions. That way there would be no mix-up or confusion with respect to old/new stuff.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Roth IRA emergency fund question

Postby grabiner » Sat Mar 16, 2013 11:50 pm

livesoft wrote:I would use another financial institution for the new Roth contributions. That way there would be no mix-up or confusion with respect to old/new stuff.


Old versus new doesn't matter here; the amount you are allowed to withdraw penalty-free is equal to the total amount you have contributed, and you can withdraw it from any account. For example, if you have contributed $20,000 to the new Roths and invested it in stock funds which are now worth only $15,000, you can still withdraw $20,000 from your Roths as long as you have those funds somewhere, say in a money-market account in the old Roths.

What I would suggest doing is keeping the money-market fund balance in the Roths equal to the amount you are allowed to withdraw, at least until you have your whole emergency fund built up.
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Re: Roth IRA emergency fund question

Postby djlevy » Fri Mar 22, 2013 5:05 pm

[quote="grabiner
Old versus new doesn't matter here; the amount you are allowed to withdraw penalty-free is equal to the total amount you have contributed, and you can withdraw it from any account. For example, if you have contributed $20,000 to the new Roths and invested it in stock funds which are now worth only $15,000, you can still withdraw $20,000 from your Roths as long as you have those funds somewhere, say in a money-market account in the old Roths.

What I would suggest doing is keeping the money-market fund balance in the Roths equal to the amount you are allowed to withdraw, at least until you have your whole emergency fund built up.[/quote]

That makes sense. My plan is to keep around 1 month of income in a local credit union and am trying to figure out where to keep the rest. I like the simplicity of just having one Roth account for each of us and just splitting the rest of the emergency fund between our accounts.
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Re: Roth IRA emergency fund question

Postby retiredjg » Fri Mar 22, 2013 5:19 pm

djlevy wrote:My question comes down to this: If our plan is to use the Roth as our emergency fund is there any reason not to put it in the LifeStrategy Fund?

This is the same as asking if it is OK to use 80% stocks and 20% bonds for your emergency fund. That would not be an emergency fund. It would be a "might be there when you need it" fund.

No matter where you hold it, an emergency fund should be low risk and liquid.
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Re: Roth IRA emergency fund question

Postby Jay69 » Sat Mar 23, 2013 9:44 pm

I happen to like Vanguards VCSH as a EM fund in a Roth. If you are unable to fill all your tax avantage space then to me using a Roth to hold the EM fund is not a bad idea. We keep 3 months in checking and about 9 months in the Roth. Your are just saving the space for latter if no emergency comes about.

We are now buying I-bonds and waiting for the one year mark to get here. After that the Roth just becomes part of the retirment pile if no emergency comes about. I fiqure we saved about 3-4 years of space.
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