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Emergency fund in SWVXX in Roth IRA?

Posted: Wed Mar 13, 2019 9:52 am
by wxturtle
Currently have my emergency fund sitting at Ally (2+%). Also have a Roth IRA at Schwab. I have *not* maxed out my Roth for the 2018 tax year (have until April 15 to do so).

I do *not* have enough disposal income to throw into the Roth this year (new house, new kid, new job, student loans, etc.) AND feel comfortable with my emergency fund. That said, I am thinking I should still put $5500 in for 2018 and invest it in something "safe" like SWVXX. My reasoning is thus:

A.) If I do not contribute $5,500 by April 15, I lose that tax-advantaged space forever (i.e., better to put emergency money into the Roth versus not contributing at all).
B.) Contributions can be withdrawn penalty free, so fundamentally, there is no difference to me if the $5500 is needed -- same if it was in the Roth first or the Ally acct first.
C.) In an ideal world, I rebuild the emergency fund at Ally over the next few months, at which point I can re-allocate the 2018 Roth $5,500 in my 80/20 mix and remove it from my "emergency" budget.

Is there anything flawed with this thinking? Am I overlooking some tax implication, etc.?

Re: Emergency fund in SWVXX in Roth IRA?

Posted: Wed Mar 13, 2019 10:29 am
by Alan S.
Sounds fine. I assume your first emergency funds would be drawn from Ally, so the Roth IRA would be your secondary emergency reserve.

If and when you did need to tap the Roth before October, you should just request a distribution of the dollar amount you need. Don't ask for a return of your 2018 contribution with earnings. The latter option is only useful if you can replace that contribution before 4/15/2019 and at this point that doesn't seem likely if you have an emergency.

If this was your 2019 contribution however, then you would consider the return of the specific contribution as that would allow you to replace that contribution anytime prior to 4/15/2020 and preserve your Roth space.

Re: Emergency fund in SWVXX in Roth IRA?

Posted: Wed Mar 13, 2019 2:51 pm
by megabad
Sounds good to me. Roth contributions as a secondary emergency fund is not an uncommon strategy.

As to Alan's great points, I hope this is a 2018 contribution because otherwise, $500 is being left on the table :D. Don't forget your $6,000 contribution for 2019.

Re: Emergency fund in SWVXX in Roth IRA?

Posted: Wed Mar 13, 2019 7:15 pm
by wineandplaya
Also consider opening up a ROTH IRA savings account at Ally. Same interest as taxable savings, but tax-free and you'd be able to move the money to index funds in the future.