Can a Roth be an emergency EF?

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Alan.Th
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Can a Roth be an emergency EF?

Post by Alan.Th » Sun Sep 08, 2019 2:42 pm

Unfortunately we find our household in a bit of a tough spot for the first time. We have been saving an average of 30% of our income since we got married, for retirement and in our mid 30s we now have $270k in total retirement with about $70k in Roth’s and the rest in 401k. But our income has just been cut to $95k gross per year including benefits and we began cutting expenses though it has still resulted in us having to use a small part of our $10 emergency fund. If we don’t increase our income soon, then this emergency fund will continue to be needed and it can sustain us for quite a few more months. But in that time if we have a new emergency such as a major house issue or car breaks down etc, would the Roth IRA contributions be the next emergency Emergency Fund? This is our way to try and make the best out of a bad situation and bad options. We could use a HELOC if needed too. And we are open to ideas. Can anyone offer help or advice should it be needed?

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MNGopher
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Re: Can a Roth be an emergency EF?

Post by MNGopher » Sun Sep 08, 2019 2:49 pm

Roth space is pretty valuable, especially if you put the money in when your income was much lower, so I wouldn't want to use it as an emergency fund unless I had no other options.

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Re: Can a Roth be an emergency EF?

Post by AlohaJoe » Sun Sep 08, 2019 2:51 pm

Can a Roth be an emergency fund? Yes, sure.

I don't think "our salary was cut but we haven't felt like cutting our expenses to get back in the black" counts as an emergency, though.

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Re: Can a Roth be an emergency EF?

Post by livesoft » Sun Sep 08, 2019 3:01 pm

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BL
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Re: Can a Roth be an emergency EF?

Post by BL » Sun Sep 08, 2019 3:02 pm

My thoughts are: Yes, but----

It is good to know you have it there for emergencies, but what you are describing does not fit my definition of emergency. This is your new reality, and you need to find ways to live on that income, and build up an emergency fund as well. The things you mentioned might be considered "lumpy expenses", expected and needing to be pre-funded, not borrowed for.

Consider a crash slashing of expenses: cable, phone plans, eating out, vacations, clothing, liquor or junk food, and other non-essential purchases, get a second job, etc. Try it for a short while, say 6 months, while you try to get stabilized either by a permanent adjustment to a new income level or get more income somehow. If it is the new reality, you may have to consider major permanent changes: sell home, cars, etc., whatever it takes to live below your new income reality. The fact is you are way above the average family income even now.

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Re: Can a Roth be an emergency EF?

Post by Small Savanna » Sun Sep 08, 2019 3:03 pm

Is the reduction in income temporary or permanent? And if temporary, do you have a good guess of how long it will last? For example if one of you is unemployed but with good job prospects, then this is an issue of managing cash flow for a few months. That's a much different situation than permanent unemployment or long term disability, which might require a permanent change in lifestyle.

Assuming the reduction in income is temporary, I'd reduce all non-essential expenses and stop retirement account contributions first, then consider a HELOC, and only take money out of retirement accounts as a last resort. Before you do that, make sure you know the tax consequences. As I understand it, Roth contributions can be withdrawn without taxes or penalties, but if you withdraw earnings there is a tax hit and a 10% penalty. I'm not an expert, so make sure you read the rules carefully. Even if you can avoid taxes and penalties, you've lost a part of your future retirement income, which could take a while to recover from.

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Re: Can a Roth be an emergency EF?

Post by Nate79 » Sun Sep 08, 2019 3:58 pm

Maybe for keeping you from being homeless (ie last resort) but a Roth is not a real emergency fund - pulling the funds out is permanent. A savings account you can deplete and then when the emergency fund is not needed you can build it back up.

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Re: Can a Roth be an emergency EF?

Post by fru-gal » Sun Sep 08, 2019 4:30 pm

A Roth is the last thing I'd take money out of.

$95K is a decent annual gross income. Can you not adjust to that by cutting spending, and if it looks like a long term situation, consider whether you own too much house, etc.?

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Re: Can a Roth be an emergency EF?

Post by gclancer » Sun Sep 08, 2019 4:39 pm

I’d sooner take a 401(k) loan than tap my Roth money. You can always use the Roth money to pay off the 401(k) loan if things continue to go south.

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Re: Can a Roth be an emergency EF?

Post by whodidntante » Sun Sep 08, 2019 5:09 pm

If you are disciplined, inexpensive credit is a good way to plug short-term cash flow issues. I would also sell any stuff you don't need anymore, and cut expenses. Also, take a job that is beneath you until the world agrees that you're worth more. It's really easy to cut expenses when you earn $12 an hour to cover them. Or start a business that is not capital intensive and can quickly turn a profit.

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Re: Can a Roth be an emergency EF?

Post by willthrill81 » Sun Sep 08, 2019 5:13 pm

MNGopher wrote:
Sun Sep 08, 2019 2:49 pm
Roth space is pretty valuable, especially if you put the money in when your income was much lower, so I wouldn't want to use it as an emergency fund unless I had no other options.
You mean you would only use an emergency fund for real emergencies? ;)
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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MNGopher
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Re: Can a Roth be an emergency EF?

Post by MNGopher » Sun Sep 08, 2019 5:27 pm

willthrill81 wrote:
Sun Sep 08, 2019 5:13 pm
MNGopher wrote:
Sun Sep 08, 2019 2:49 pm
Roth space is pretty valuable, especially if you put the money in when your income was much lower, so I wouldn't want to use it as an emergency fund unless I had no other options.
You mean you would only use an emergency fund for real emergencies? ;)
Reeeaally big emergencies only.

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Alan.Th
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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Sun Sep 08, 2019 6:43 pm

BL wrote:
Sun Sep 08, 2019 3:02 pm
My thoughts are: Yes, but----

It is good to know you have it there for emergencies, but what you are describing does not fit my definition of emergency. This is your new reality, and you need to find ways to live on that income, and build up an emergency fund as well. The things you mentioned might be considered "lumpy expenses", expected and needing to be pre-funded, not borrowed for.
Lumpy expenses is a better way to explain my issue opposed to emergency. As a result of poor planning, we have been maxing all our retirement accounts over the years and not saving additional pre-funded money. If we had been setting aside more money for these ecebtusl, future expenses, then some of the 30% we were saving wouldn’t have ended up in the retirement accounts. While it pains me to take money out of my Roth, due to no tax penalty, that appears to be one way to correct for this lack of foresight when we saved for retirement in the last few years. It’s said on this forum often that people should sell individual stocks because if they had that money in cash they wouldn’t advice the purchase of the stock. In this case could that be reverse engineered a bit and say, had we planned better and saved more than the $10k for emergencies we wouldn’t have funded our retirement accounts as much, so, if given the option today, we’d set aside more money in a savings account rather than fully fund retirement accounts. As it would be sad to remove money from a Roth, I’m open and hopefully will find other ideas. But am I thinking logically above?

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Alan.Th
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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Sun Sep 08, 2019 6:49 pm

Small Savanna wrote:
Sun Sep 08, 2019 3:03 pm
Is the reduction in income temporary or permanent? And if temporary, do you have a good guess of how long it will last? For example if one of you is unemployed but with good job prospects, then this is an issue of managing cash flow for a few months. That's a much different situation than permanent unemployment or long term disability, which might require a permanent change in lifestyle.

Assuming the reduction in income is temporary, I'd reduce all non-essential expenses and stop retirement account contributions first, then consider a HELOC, and only take money out of retirement accounts as a last resort. Before you do that, make sure you know the tax consequences. As I understand it, Roth contributions can be withdrawn without taxes or penalties, but if you withdraw earnings there is a tax hit and a 10% penalty. I'm not an expert, so make sure you read the rules carefully. Even if you can avoid taxes and penalties, you've lost a part of your future retirement income, which could take a while to recover from.
It’s unknown but likely the income wont be fully replaced for a few years. There was a unique part time job that paid quite well because there was no need to include benefits with that job and there was an unusual work from home opportunity that helped our situation. A lesser income part time job could and will be included in our household income likely before the end of the year.

You’d suggest a HELOC over tax free withdrawals from a Roth? Is the added interest payment worth keeping that money in the Roth?

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Alan.Th
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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Sun Sep 08, 2019 6:51 pm

fru-gal wrote:
Sun Sep 08, 2019 4:30 pm
A Roth is the last thing I'd take money out of.

$95K is a decent annual gross income. Can you not adjust to that by cutting spending, and if it looks like a long term situation, consider whether you own too much house, etc.?
We are cutting through expenses but could use any extra ideas if you have tips or suggestions please

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Re: Can a Roth be an emergency EF?

Post by Admiral » Sun Sep 08, 2019 6:55 pm

Post your expenses. Then we can be of more help.

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Alan.Th
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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Sun Sep 08, 2019 6:57 pm

whodidntante wrote:
Sun Sep 08, 2019 5:09 pm
Also, take a job that is beneath you until the world agrees that you're worth more. It's really easy to cut expenses when you earn $12 an hour to cover them. Or start a business that is not capital intensive and can quickly turn a profit.
Your point is exactly right and we won’t let pride get in the way, but intially we are hoping to replace income before that’s necessary. As the income we lost came from a unique part time job, the limited hours makes it tough to replace at a lower hourly rate. But that’s on the table for us.

We’d love the business idea as we have some unique times throughout the day/evening to work, which makes it tough for a job that requires more regular hours. We’ve been reading about affiliate websites and blogs, which don’t require much money at all, just time, however it’s doubtful that would offer a profit for a half year, if ever. Would you have any suggestions? It would be much appreciated if you’d be willing to share please.

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Re: Can a Roth be an emergency EF?

Post by MathWizard » Sun Sep 08, 2019 7:24 pm

Welcome to Bogleheads!

To answer your question:. Yes Roth contributions can act as an emergency fund.

As I understand it, your plan is to supplement your current expenses from the $10K rather than pull from the Roth right now, but consider the Roth as your EF until things correct themselves.

I assume you are no longer saving 30% of your income, otherwise I would suggest reducing retirement savings above the company match in the interim.

Absent that, your plan seems sound until you can match income and expenses.

I assume what happened is that your expenses went up while you had the the part time income. Life happens. Now you just need to get back to at least matching income with expenses .

By saving so well, you have put yourself in a better condition than most your age.

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Re: Can a Roth be an emergency EF?

Post by Small Savanna » Sun Sep 08, 2019 11:32 pm

With the additional information that the income won't be replaced for a few years, I'm less supportive of either the HELOC option or taking money from the Roth. It's okay to spend more than you make for a few months, such as in the case of short term unemployment. Spending more than you make for a few years can lead to crippling debt and/or failure to put enough away for the future. You may have to take a hard look at expenses: do you have nicer cars than you need? Can you get by with one car? Can you reduce your housing expenses? None of this is easy, but if you cut expenses now, you won't have to cut as hard later.

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Re: Can a Roth be an emergency EF?

Post by fru-gal » Mon Sep 09, 2019 5:12 pm

Alan.Th wrote:
Sun Sep 08, 2019 6:51 pm
fru-gal wrote:
Sun Sep 08, 2019 4:30 pm
A Roth is the last thing I'd take money out of.

$95K is a decent annual gross income. Can you not adjust to that by cutting spending, and if it looks like a long term situation, consider whether you own too much house, etc.?
We are cutting through expenses but could use any extra ideas if you have tips or suggestions please
A couple of months ago I started logging in Excel everything I spent. Well, groceries for example as a lump, not per item. This is easy to do as I charge most everything, both to get the 1.5% cash back and to track my monthly spending lump sum easily, as my credit card website has purchase amounts available within hours. (I pay the credit card bill in full every month.)

I find that this has reduced almost all of my impulse purchases and caused me to look more closely at cheapest options for things. Even though I am single, I do a lot more bulk buying, for example.

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Re: Can a Roth be an emergency EF?

Post by finsterfolly » Mon Sep 09, 2019 5:22 pm

fru-gal wrote:
Mon Sep 09, 2019 5:12 pm
A couple of months ago I started logging in Excel everything I spent. Well, groceries for example as a lump, not per item. This is easy to do as I charge most everything, both to get the 1.5% cash back and to track my monthly spending lump sum easily, as my credit card website has purchase amounts available within hours. (I pay the credit card bill in full every month.)

I find that this has reduced almost all of my impulse purchases and caused me to look more closely at cheapest options for things. Even though I am single, I do a lot more bulk buying, for example.
I just did that as well, and I went back for all of 2018 through August 2019 to get an idea of our yearly spend. I got a significant pay increase a few years ago, and the wife and I have had a little lifestyle creep to go along with it. We went through our spending to create a budget for next year without any finger pointing. She was surprised to see how much is spent on household items each year (I wasn't). I was surprised to see how much is spent on eating out each year, which is my weakness. There is a big opportunity in just those two categories, with lots of little stuff like cancelling subscriptions and changing out cable plans that also add up.

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Re: Can a Roth be an emergency EF?

Post by Hector » Mon Sep 09, 2019 6:14 pm

Yes. I would withdraw from Roth before HELOC.

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Re: Can a Roth be an emergency EF?

Post by grabiner » Mon Sep 09, 2019 8:03 pm

MNGopher wrote:
Sun Sep 08, 2019 2:49 pm
Roth space is pretty valuable, especially if you put the money in when your income was much lower, so I wouldn't want to use it as an emergency fund unless I had no other options.
I agree that Roth space is valuable; therefore, if you do need money, you may want to consider alternatives to withdrawing it from a Roth account.

However, it is is better to put the emergency fund in your Roth (in a low-risk investment such as a short-term bond fund) than not to have a Roth at all and put the emergency fund in your taxable account. If you need to use the money in an emergency, you haven't lost anything by putting it in the Roth. If you don't need to use the money, you get tax-free growth, and have more tax-favored savings for the future.
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Re: Can a Roth be an emergency EF?

Post by Maven » Mon Sep 09, 2019 8:49 pm

Right now we have $6k in my husband's Roth IRA earmarked as part of our emergency fund. It's in a money market account while the rest of the funds are invested according to our AA. I wanted to fill up the Roth space before the opportunity is gone, but with 2 young children and very expensive childcare costs the next few years, we don't have enough cashflow to fill all tax-advantaged space. I pulled the $6k over from our high interest savings account but keep a detailed record of what counts as emergency fund money. When we're able to refill the savings account, I'll invest the $6k. I wouldn't hesitate to use this Roth money after depleting the saving account in the event of an emergency. That's what it's there for and the Roth wouldn't have been filled otherwise.

Best of luck to you.

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Re: Can a Roth be an emergency EF?

Post by MNGopher » Mon Sep 09, 2019 9:47 pm

A lot depends on your definition of an emergency. If my washing machine or water heater broke down, and I have good credit, I would consider a low interest loan or picking up some ot at work before dipping into the Roth.

If I need to get out of a central American prison, well then, I don't care where I took the money from.

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Re: Can a Roth be an emergency EF?

Post by willthrill81 » Mon Sep 09, 2019 10:49 pm

MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
A lot depends on your definition of an emergency. If my washing machine or water heater broke down, and I have good credit, I would consider a low interest loan or picking up some ot at work before dipping into the Roth.
Yep. We'll be washing clothes in buckets or taking cold showers before we dip into Roth accounts for such trivial things. But for us, we save monthly for such irregular expenses and wouldn't consider it to be an emergency at all. I'm always amazed when people talk about their car needing a repair being an emergency as if they never expected or prepared for such a thing.
MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
If I need to get out of a central American prison, well then, I don't care where I took the money from.
:sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can a Roth be an emergency EF?

Post by Breezy » Tue Sep 10, 2019 11:44 am

It might make more sense to cut back on your 401K contributions than to tap your Roth. I would also consider selling a vehicle if it would bring you the money you might need & either do without for a bit or replace it with a cheaper one. I would check to see if you can withhold less for taxes - do you get a refund every year? That's cash you could be using now. Would refinancing your house help?

I highly recommend using budgeting software such as YNAB because not only will it definitely help you cut your expenses, but over time you'll come to understand the impact of "irregular" expenses that can be a big hit if not planned for, such as car insurance, property taxes, tax prep, planned travel, dental work, etc.

Also, the community at Mr. Money Mustache loves helping with case studies, so if you post your budget and situation there (or here), you'll likely get great help.

In my own past, I did consider my Roth an emergency fund if needed. Thankfully, I never had to tap it & now I'm really happy to see the balance in there! So I'd recommend you do whatever to minimize or eliminate the need to use it. With 270K and no additional contributions, earning 5% return per year, you'd have over $1.1 million in 30 years. You guys have really laid the groundwork well & ideally you'll get through this rough patch and back to being able to continue growing your savings.

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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Wed Sep 11, 2019 6:04 pm

MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
A lot depends on your definition of an emergency. If my washing machine or water heater broke down, and I have good credit, I would consider a low interest loan or picking up some ot at work before dipping into the Roth.

If I need to get out of a central American prison, well then, I don't care where I took the money from.
Lol
Both are good points. What do you do for all the situations between those two events?

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Alan.Th
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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Wed Sep 11, 2019 6:14 pm

willthrill81 wrote:
Mon Sep 09, 2019 10:49 pm
MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
A lot depends on your definition of an emergency. If my washing machine or water heater broke down, and I have good credit, I would consider a low interest loan or picking up some ot at work before dipping into the Roth.
Yep. We'll be washing clothes in buckets or taking cold showers before we dip into Roth accounts for such trivial things. But for us, we save monthly for such irregular expenses and wouldn't consider it to be an emergency at all. I'm always amazed when people talk about their car needing a repair being an emergency as if they never expected or prepared for such a thing.
MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
If I need to get out of a central American prison, well then, I don't care where I took the money from.
:sharebeer
We were wrong to save for retirement rather than set aside money for likely, non emergent, expenses such as major car trouble. After this mistake was made, how do we correct for an event such as major car trouble in the next few months before we can save enough money, do we take from the retirement accounts which shouldn’t have been overly funded in the first place?

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Re: Can a Roth be an emergency EF?

Post by willthrill81 » Wed Sep 11, 2019 7:01 pm

Alan.Th wrote:
Wed Sep 11, 2019 6:14 pm
willthrill81 wrote:
Mon Sep 09, 2019 10:49 pm
MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
A lot depends on your definition of an emergency. If my washing machine or water heater broke down, and I have good credit, I would consider a low interest loan or picking up some ot at work before dipping into the Roth.
Yep. We'll be washing clothes in buckets or taking cold showers before we dip into Roth accounts for such trivial things. But for us, we save monthly for such irregular expenses and wouldn't consider it to be an emergency at all. I'm always amazed when people talk about their car needing a repair being an emergency as if they never expected or prepared for such a thing.
MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
If I need to get out of a central American prison, well then, I don't care where I took the money from.
:sharebeer
We were wrong to save for retirement rather than set aside money for likely, non emergent, expenses such as major car trouble. After this mistake was made, how do we correct for an event such as major car trouble in the next few months before we can save enough money, do we take from the retirement accounts which shouldn’t have been overly funded in the first place?
If the event (i.e. major car trouble) hasn't happened yet, then you could just reduce your contributions to retirement accounts (being sure to continue getting all of any applicable 401k match) until you have enough funds. I definitely wouldn't recommend that you pull funds from a retirement account to do so, which will generally involve paying a 10% penalty (20% if an HSA) in addition to your marginal tax rate, unless you had no other choice. If you're really concerned that such an event might happen soon, you might preemptively take out a credit card with a 0% introductory period. I know that you can get some with 15 and 18 month 0% promo periods.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Can a Roth be an emergency EF?

Post by MNGopher » Wed Sep 11, 2019 7:08 pm

Alan.Th wrote:
Wed Sep 11, 2019 6:04 pm
MNGopher wrote:
Mon Sep 09, 2019 9:47 pm
A lot depends on your definition of an emergency. If my washing machine or water heater broke down, and I have good credit, I would consider a low interest loan or picking up some ot at work before dipping into the Roth.

If I need to get out of a central American prison, well then, I don't care where I took the money from.
Lol
Both are good points. What do you do for all the situations between those two events?
I keep a little more in my checking account than most Bogleheads (couple months expenses). If I have an emergency beyond that I also have some Vanguard Money market funds as part of my asset allocation that I think can be liquidated in a couple days.

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Re: Can a Roth be an emergency EF?

Post by Alan.Th » Wed Sep 11, 2019 7:40 pm

Breezy wrote:
Tue Sep 10, 2019 11:44 am
It might make more sense to cut back on your 401K contributions than to tap your Roth.
We are contributing 0% to retirement until we get expenses low enough to start investing again

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Re: Can a Roth be an emergency EF?

Post by willthrill81 » Wed Sep 11, 2019 7:51 pm

Alan.Th wrote:
Wed Sep 11, 2019 7:40 pm
Breezy wrote:
Tue Sep 10, 2019 11:44 am
It might make more sense to cut back on your 401K contributions than to tap your Roth.
We are contributing 0% to retirement until we get expenses low enough to start investing again
Does your 401k offer a match?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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