AA for Roth (emergency fund)

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Topic Author
Iporante
Posts: 17
Joined: Tue Dec 22, 2020 12:20 pm

AA for Roth (emergency fund)

Post by Iporante »

I would like advice on AA for emergency funds held in a Roth. For context, we max 401K contributions (26K plus 19.5K per year) and also contribute heavily to a 529 (16K+ per year), given a relatively late start with kid #1 starting college next year, but have very small Roth and taxable accounts. Our emergency fund is currently at 62K, which would cover 7 months of bills plus frugal living expenses for our family of four assuming absolutely no salary or income from our rental. It would last a lot longer if just one of us lost our job or had a reduction in pay, and I believe my job is quite secure barring worldwide economic meltdown.
So, my plan is to put 26K of the fund in Roths for 2020 & 2021 (6+6 for spouse and 7+7 for me). The goal is to preserve this principal as a kind-of-liquid EF, shifting to riskier AA for earnings and future principal but leaving that initial fixed dollar amount invested conservatively.
Given this, does 50% in TIPS (VTIP) and 50% in Total Bond (VBTLX) sound like a good approach?
Many thanks!
tomsense76
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Re: AA for Roth (emergency fund)

Post by tomsense76 »

Welcome to the forum! :sharebeer

Have also been in the process of more efficiently allocating my EF as well. This involves thinking about your portfolio more holistically. IOW a Stable value fund or bond allocation in one's tax-deferred plan can be a part of this allocation. Would read this wiki section for more details.

If possible, would recommend holding fixed income in one's tax deferred account instead of Roth. When it comes time to liquidate, one can exchange fixed income for equities in tax deferred and sell equities in Roth to get access to cash. This has the effect of tapping into the fixed income in tax deferred directly, but without having to take a 401k withdrawal necessarily. The wiki talks about doing this with taxable, but the same exercise can be performed with different accounts.

One thing to keep in mind is how much one has in equities and what that will look like if we saw a steep decline (the Great Recession saw a ~50% decline to help establish a worst case scenario). So this sets a bound on what can be realistically withdraw from a Roth in a worst case scenario.
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Scott S
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Re: AA for Roth (emergency fund)

Post by Scott S »

^ tomsense76 beat me to posting the link! :beer

I do something very similar, except without the cash/money market fund: in an emergency, I'd sell stocks in my taxable account, and then rebalance from bonds to stocks in my Roth to maintain my AA.
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tcb1005
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Re: AA for Roth (emergency fund)

Post by tcb1005 »

Hello,
Have you also considered in simply holding Series I savings bonds as well? https://www.treasurydirect.gov/indiv/pr ... glance.htm
They pay a variable rate indexed to inflation, currently 1.68%, and I believe they grow tax deferred. Furthermore they are exempt from state income taxes. A negative for them in your situation however is they must be held at minimum for 1 year, and if you liquidate between 1-5 years, there is a three month interest penalty.

Kind Regards,
Topic Author
Iporante
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Joined: Tue Dec 22, 2020 12:20 pm

Re: AA for Roth (emergency fund)

Post by Iporante »

tomsense76 wrote: Tue Jan 12, 2021 9:18 pm Welcome to the forum! :sharebeer

Have also been in the process of more efficiently allocating my EF as well. This involves thinking about your portfolio more holistically. IOW a Stable value fund or bond allocation in one's tax-deferred plan can be a part of this allocation. Would read this wiki section for more details.
Thanks, tomsense76 and Scott S, for this suggestion. This is good advice. I'm a little reticent about abandoning the Roth idea, though, because because colleges do not typically use retirement savings in calculating expected parent contribution. I"ll have to mull this over.
Topic Author
Iporante
Posts: 17
Joined: Tue Dec 22, 2020 12:20 pm

Re: AA for Roth (emergency fund)

Post by Iporante »

tcb1005 wrote: Tue Jan 12, 2021 9:28 pm Hello,
Have you also considered in simply holding Series I savings bonds as well? https://www.treasurydirect.gov/indiv/pr ... glance.htm
They pay a variable rate indexed to inflation, currently 1.68%, and I believe they grow tax deferred. Furthermore they are exempt from state income taxes. A negative for them in your situation however is they must be held at minimum for 1 year, and if you liquidate between 1-5 years, there is a three month interest penalty.

Kind Regards,
Hi tcb1005. This is another great idea. Thanks!
KlangFool
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Re: AA for Roth (emergency fund)

Post by KlangFool »

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund


OP,


Just put the money into a money market fund inside the Roth IRAs. Why do anything else? Emergency Fund = CASH.


KlangFool
Luke Duke
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Re: AA for Roth (emergency fund)

Post by Luke Duke »

KlangFool wrote: Wed Jan 13, 2021 1:36 pm Just put the money into a money market fund inside the Roth IRAs. Why do anything else? Emergency Fund = CASH.

KlangFool
Because cash does not keep up with inflation and one does not typically need all of their emergency fund all at once.
KlangFool
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Re: AA for Roth (emergency fund)

Post by KlangFool »

Luke Duke wrote: Wed Jan 13, 2021 1:52 pm
KlangFool wrote: Wed Jan 13, 2021 1:36 pm Just put the money into a money market fund inside the Roth IRAs. Why do anything else? Emergency Fund = CASH.

KlangFool
Because cash does not keep up with inflation and one does not typically need all of their emergency fund all at once.
Luke Duke,


And, if you really need all your emergency fund all at once, you will lose a lot more than whatever alternative that you choose. The RISK is not worth it.


I do not play games with my emergency fund.


KlangFool
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geerhardusvos
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Re: AA for Roth (emergency fund)

Post by geerhardusvos »

My Roth space is precious, so it’s all in equities. Cash emergency funds are overrated, but if you really want one it should be held in a money market account, checking account, no penalty CD, or a stable fund in taxable that you can sell immediately.
VTSAX and chill
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