Roth Contributions as "Emergency Fund?"

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jolmscheid
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Roth Contributions as "Emergency Fund?"

Post by jolmscheid »

Hello all. I looked at past threads on the topic of using roth contributions as an emergency fund, but would like any updated thoughts on the subject? Please note that the Roth is not the only retirement fund being used. We have employer 401k's that we attempt to max out every year. So, having said that, what is the general consensus on utilizing Roth contributions as an Emergency fund source? My thoughts being that contributions can be taken out at any time without penalty, the Roth is not our only retirement "nest egg" source, balance grows tax free, and if we don't ever "use" the contributions/all the contributions for an emergency then that is a pure bonus and funds continue to grow tax free.

Would appreciate the pros / cons to this instead of holding say $10,000 in a money market / savings account.

Thanks so much!
retiredjg
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Re: Roth Contributions as "Emergency Fund?"

Post by retiredjg »

Your emergency fund needs to be held in something like cash or money market no matter where it resides - in an ordinary account or in the Roth IRA.

Yes, if you cannot put money into both, using the Roth IRA as a place to hold your emergency fund is reasonable.

I don't see a problem using Roth IRA as a place to hold your emergency fund if the investment is liquid and if you are willing to do the extra paperwork on your taxes each year you withdraw something.

It also requires keeping records of all of your withdrawals until you are at least 59.5. If you use the emergency fund for a $200 doctor bill or a $300 car repair every few years, it may be easier to just keep some cash in savings.
HomeStretch
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Re: Roth Contributions as "Emergency Fund?"

Post by HomeStretch »

It isn’t clear to me whether you propose to hold your emergency fund (EF) in a Roth IRA because:
(1) you think it’s a better option than a Taxable account or (2) you can’t contribute enough to max out your 401k/Roth IRAs while maintaining a separate EF in a Taxable account like a high yield savings account.

If #1 -
if you can afford to max out your 401k/Roth IRA accounts while maintaining an adequate liquid emergency fund in a high yield savings account, that might be your optimal choice. You would be able to hold 100% equity in your Roth accounts for higher expected tax-free growth. As your Roth accounts grow larger over the years, the growth can really compound.

If #2 -
Roth IRA is an option for the EF as long as it’s held in safe liquid holdings as pointed out by retiredjg.
vtMaps
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Re: Roth Contributions as "Emergency Fund?"

Post by vtMaps »

retiredjg wrote: Fri Jun 05, 2020 7:28 am It also requires keeping records of all of your withdrawals until you are at least 59.5. If you use the emergency fund for a $200 doctor bill or a $300 car repair every few years, it may be easier to just keep some cash in savings.
+1

OP, learn about IRS form 8606 and the reporting requirements on your taxes. $10,000 of cash in a Roth (rather than a savings account) will save you maybe $130 per year in taxable income. That may not be worth the effort of the reporting requirements.

--vtMaps
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armeliusc
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Re: Roth Contributions as "Emergency Fund?"

Post by armeliusc »

vtMaps wrote: Fri Jun 05, 2020 7:58 am
retiredjg wrote: Fri Jun 05, 2020 7:28 am It also requires keeping records of all of your withdrawals until you are at least 59.5. If you use the emergency fund for a $200 doctor bill or a $300 car repair every few years, it may be easier to just keep some cash in savings.
+1
OP, learn about IRS form 8606 and the reporting requirements on your taxes. $10,000 of cash in a Roth (rather than a savings account) will save you maybe $130 per year in taxable income. That may not be worth the effort of the reporting requirements.
Note that you only need to report it if you make a withdrawal that year. And even so it's not too hard to do. I've done it by hand as we withdrew part of our Roth IRA contribution for house downpayment.

On the other hand, you should not need to touch your emergency fund for $200 - $300 level "unexpected" needs. This should be considered part of your cash flow, i.e. one needs to make sure one has enough reserve in the day-to-day checking account to handle this sort of thing.

We started with just using Roth contribution as our EF (above the day-to-day reserve I mentioned above for most lumpy expenses). Everything was just in Vanguard TR then. Then we switched and put some into I-Bond to hold for 3 - 6 months expenses. So now we sort of have a tiered EF: "low-level EF" in high yield saving account ( < $3000), I-Bond, Roth IRA contribution (last resort of some sort).
livesoft
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Re: Roth Contributions as "Emergency Fund?"

Post by livesoft »

The idea of Roth IRA as an emergency fund arises when one does not have enough money to make BOTH a Roth IRA contribution AND have an emergency fund. An example of this is someone just starting out with a new job and only $1,000 extra cash in December because everything else went to pay their bills and expenses. Do they put the $1,000 in a savings account and call it an emergency fund or do they put the $1,000 in a Roth IRA money market fund and call it an emergency fund? I think it is better to put the $1,000 in the Roth IRA.

I talked to someone yesterday who did not even know what a Roth IRA was. They used a financial advisor who has them in a managed taxable account who never told them about Roth IRAs and also didn't stress to contribute to their 401(k) work plan. That is, the salesrep wanted all their savings and investments to be subject to his 1.25% AUM fee.
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sailaway
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Re: Roth Contributions as "Emergency Fund?"

Post by sailaway »

livesoft wrote: Fri Jun 05, 2020 8:26 am The idea of Roth IRA as an emergency fund arises when one does not have enough money to make BOTH a Roth IRA contribution AND have an emergency fund. An example of this is someone just starting out with a new job and only $1,000 extra cash in December because everything else went to pay their bills and expenses. Do they put the $1,000 in a savings account and call it an emergency fund or do they put the $1,000 in a Roth IRA money market fund and call it an emergency fund? I think it is better to put the $1,000 in the Roth IRA.

I talked to someone yesterday who did not even know what a Roth IRA was. They used a financial advisor who has them in a managed taxable account who never told them about Roth IRAs and also didn't stress to contribute to their 401(k) work plan. That is, the salesrep wanted all their savings and investments to be subject to his 1.25% AUM fee.
This is why we need fiduciary responsibility rules :(
Hoosier CPA
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Re: Roth Contributions as "Emergency Fund?"

Post by Hoosier CPA »

livesoft wrote: Fri Jun 05, 2020 8:26 am The idea of Roth IRA as an emergency fund arises when one does not have enough money to make BOTH a Roth IRA contribution AND have an emergency fund.
This is an important point. Not to be snarky but this is often missed on this forum. There is often an assumption that the person answering the question is able to max out all tax-deferred investment options.
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retired@50
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Re: Roth Contributions as "Emergency Fund?"

Post by retired@50 »

livesoft wrote: Fri Jun 05, 2020 8:26 am
I talked to someone yesterday who did not even know what a Roth IRA was. They used a financial advisor who has them in a managed taxable account who never told them about Roth IRAs and also didn't stress to contribute to their 401(k) work plan. That is, the salesrep wanted all their savings and investments to be subject to his 1.25% AUM fee.
Unfortunately, this sounds like standard operating procedure for many financial sales reps.

A little education can go a long way. I'm hoping you shared even a tiny bit of Boglehead wisdom.

Regards,
This is one person's opinion. Nothing more.
livesoft
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Re: Roth Contributions as "Emergency Fund?"

Post by livesoft »

retired@50 wrote: Fri Jun 05, 2020 9:56 amA little education can go a long way. I'm hoping you shared even a tiny bit of Boglehead wisdom.
Total success on that: Assets will be moved "in-kind" to a no-fee, no-commission place plus "The Bogleheads' Guide to Investing" will be checked out of the library and read. The actual investments used were not terrible and did include some Vanguard funds, but one could do better. So before any of the "in-kind" investments are sold, my friend will make a plan to follow.

So who says you should not discuss investments with your friends?
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petulant
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Re: Roth Contributions as "Emergency Fund?"

Post by petulant »

We had this situation come up for tax year 2019. I did not have enough cash on hand to make a contribution for the Roth IRA without draining a part of the emergency fund. I decided to pull $6,000 from the emergency fund to fund the Roth IRA and placed it in very safe, liquid fixed income assets as part of the emergency fund. When I have more cash to be comfortable about the non-Roth emergency fund, I will convert the Roth IRA assets to long-term retirement assets.
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gr7070
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Re: Roth Contributions as "Emergency Fund?"

Post by gr7070 »

I will contradict some of the earlier statements that all of ones EF need be held in cash-like accounts. That would depend on how big their EF is.

Portions of an EF in excess of a minimum threshold can be held at-risk. While I wouldn't recommend it, that threshold could be incredibly small.

I have a 6-month EF. 3 in cash, 3(+) in balanced funds. Granted the balanced funds have grown beyond 3 months by now. All of this is held in taxable accounts.

Certainly any of the excessively large Boglehead EFs (1+ years) could easily take a similar approach.

It's not like the financial markets will disappear. Sure, one's 6 month EF might effectively be 5 months. After some years of growth it'll be larger than 6 months, as well.

Additionally, most of us aren't using a bare bones expense, aren't considering unemployment insurance, aren't considering the (un)likelihood of losing both incomes. So that X-month EF is X+n for many.

Excessive EFs are not needed.
Last edited by gr7070 on Fri Jun 05, 2020 4:02 pm, edited 1 time in total.
hulburt1
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Re: Roth Contributions as "Emergency Fund?"

Post by hulburt1 »

I really have been thinking That all I have sent to me monthly would be put in my Roth yearly pay the tax and just have small amount sent to me monthly when needed. It would also build up my Roth for the day RDM kicks in 5 years from now. I do think it would help me control my tax's now and later. You could also use it as a Emergency fund or start you own annuity fund without the fee's. IE( for every 120000 you put in you can take out 1000 a month for 10 years tax free.
02nz
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Re: Roth Contributions as "Emergency Fund?"

Post by 02nz »

livesoft wrote: Fri Jun 05, 2020 10:01 am
retired@50 wrote: Fri Jun 05, 2020 9:56 amA little education can go a long way. I'm hoping you shared even a tiny bit of Boglehead wisdom.
Total success on that: Assets will be moved "in-kind" to a no-fee, no-commission place plus "The Bogleheads' Guide to Investing" will be checked out of the library and read. The actual investments used were not terrible and did include some Vanguard funds, but one could do better. So before any of the "in-kind" investments are sold, my friend will make a plan to follow.

So who says you should not discuss investments with your friends?
Remind that person, if you haven't already, that they have until July 15 (instead of the usual April 15 deadline) to make a Roth IRA contribution for 2019.
absolute zero
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Re: Roth Contributions as "Emergency Fund?"

Post by absolute zero »

Hoosier CPA wrote: Fri Jun 05, 2020 9:38 am
livesoft wrote: Fri Jun 05, 2020 8:26 am The idea of Roth IRA as an emergency fund arises when one does not have enough money to make BOTH a Roth IRA contribution AND have an emergency fund.
This is an important point. Not to be snarky but this is often missed on this forum. There is often an assumption that the person answering the question is able to max out all tax-deferred investment options.
I’m confused. What is the important point? Livesoft made no reference in his post to tax-deferred accounts. It sounds like you are referring to something different than him?
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FiveK
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Re: Roth Contributions as "Emergency Fund?"

Post by FiveK »

Hoosier CPA wrote: Fri Jun 05, 2020 9:38 am
livesoft wrote: Fri Jun 05, 2020 8:26 am The idea of Roth IRA as an emergency fund arises when one does not have enough money to make BOTH a Roth IRA contribution AND have an emergency fund.
This is an important point. Not to be snarky but this is often missed on this forum. There is often an assumption that the person answering the question is able to max out all tax-deferred investment options.
The wiki article Roth IRA as an emergency fund - Bogleheads does address this.
Dude2
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Re: Roth Contributions as "Emergency Fund?"

Post by Dude2 »

Due to a relative losing their job and all of their debt falling onto my back, I had to remove all Roth contributions at one point. I knew I was in the right, but it didn't stop the IRS from sending me a letter. I had to prove the account was greater than 5 years old and show proof of contributions. It got cleared up, but it was stressful (compounding an already stressful time). This was in the days when Vanguard did not have electronic records going back enough years. I had to write them and get them to mail the records. I had not been sending in 8606s along the way because you don't have to, but in hindsight that probably would have helped.

Obviously when a person is in a situation where they need to get their hands on cash, they will do what they have to do, but to consciously plan for this to be your emergency fund is, as stated above by many people, not worth the hassle. IBonds would be my choice for this.
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