Where to park Emergency Fund in Roth IRA

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CJN486
Posts: 7
Joined: Sat Jan 03, 2015 10:37 am

Where to park Emergency Fund in Roth IRA

Post by CJN486 » Wed May 17, 2017 10:07 am

I have read various threads in the Bogleheads forums that all seemed to indicate that it is generally a good idea that if you aren't able to completely max your Roth with retirement money, than it can be a wise idea to use some of your emergency funds to gain the remaining investing potential.

So Currently my wife and i together are about 3400 (1,700 each) Shy each year from maxing out our Roths.

I have a strong desire to get my emergency fund up to about 1 year ( another 8-10K or so), but seem to have a stronger desire to max out the Roth each year, knowing I cant ever make that time up again. Thinking, worst case I can withdrawal my contributions to the Roth, and each year the funds are not needed it equals a big investment win.

Wife is a stay at home mom and I bring home right at 82k.

3 Children, ages 3, 2, and a new born.

Emergency funds: We currently have 6-8+ Months Emergency fund, working on making it to 1 year.

Debt: Only the Mortgage 15yr fixed at 3.75%. Established in April 2011. 115k left on house.

No Credit Cards, student loans etc.

Tax Filing Status: (Married filing jointly. )
Tax Rate: 15% Federal, 0% State

State of Residence: FL
Age: 30

His Roth IRA at Vanguard
Currently contributing 3,800 per year into Vanguard 2050 retirement fund VFIFX

Her Roth IRA at Vanguard
Currently contributing 3,800 per year into Vanguard 2050 retirement fund VFIFX

403B at Work with 5% match through Guidestone ( all with Higher ER of course)
Currently doing 5% to get the Matching

75% in Equity Index (GEQZX) (0.45)
25% in Inflation Protected Bond (GIPZX) (0.69)

Question is: Assuming this is a good idea, should I just add the extra 3,400 into the target date funds I am already using? Or should I add another fund that is more conservative to keep these "Emergency funds" Separate.

Im newer to this so anything else you see regarding my set-up that needs some work I would love to hear, Thanks!

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CAsage
Posts: 937
Joined: Sun Mar 27, 2016 6:25 pm

Re: Where to park Emergency Fund in Roth IRA

Post by CAsage » Wed May 17, 2017 10:15 am

Putting your emergency fund into a Roth is not a bad idea at all - no real downside. Suggest you consider your entire portfolio as one big pot, then decide how much you want in bonds/cash vs equity, and stuff the 'emergency' funds into your Roth in the cheapest short/intermediate bond fund you can find. Also, you might consider putting your 401k fund only in the (again...) cheapest fund they have, just the equity fund in your example of two funds, and then overweight the Roth slightly in bonds to make up for that according to your desired bond allocation.... At 30, maybe 20% bonds, more to include your emergency fund.
Another option would be to line up a HELOC with no fees, and don't use it except as backup. With a wife and three darlings, you also need to line up term life insurance! Once you get another 10 years down the road and have more under the mattress, it would make sense to have your Roth be only the stocks, but not now.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Countermoon
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Joined: Wed Feb 13, 2013 10:22 pm

Re: Where to park Emergency Fund in Roth IRA

Post by Countermoon » Wed May 17, 2017 12:53 pm

Wouldn't any high-quality total bond market index fund (VBMFX or SWAGX) be ideal?

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CAsage
Posts: 937
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Re: Where to park Emergency Fund in Roth IRA

Post by CAsage » Wed May 17, 2017 4:50 pm

Bond funds are vulnerable to drops if interest rates go up. If you want safe money, then short durations are the way to go. Read up on "duration" (which is approximately the number of years an account will recover current value with a 1% interest rate hike).... Personally, I like to match the "duration" or average term of a bond fund to about the years you need the funds. So, half my retirement bond allocation is in Total Bond Fund which has a duration of 6.1 years, and about half is in Short Corporate, for the funds I will need in 2~3 years.... Totally personal choice, I'm cautious - suggest avoiding High Yield funds! :sharebeer
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

MathWizard
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Joined: Tue Jul 26, 2011 1:35 pm

Re: Where to park Emergency Fund in Roth IRA

Post by MathWizard » Wed May 17, 2017 5:13 pm

I know some people who use ROTH IRA CD's at their bank.
Clearly for just principal, and ignoring inflation, nothing is safer than FDIC insured.

I have considered this for just for not wasting the ROTH space, but have not done so.

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celia
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Location: SoCal

Re: Where to park Emergency Fund in Roth IRA

Post by celia » Wed May 17, 2017 5:34 pm

OP, You have a good understanding of everything, especially the power of Roths.
CJN486 wrote:Question is: Assuming this is a good idea, should I just add the extra 3,400 into the target date funds I am already using? Or should I add another fund that is more conservative to keep these "Emergency funds" Separate.
I like this concept as it would be a reminder that you can always use some for emergencies (not that you need a reminder). But, in practice, most funds need a minimum of $3,000 to invest in it. Why not max out that contribution first. Then in only one Roth, exchange some of the target fund for $3,000 or $3,400 of a bond fund. Next year, you can do the same or something different in the other Roth. Of course, your account values will not be the same, but who says they need to be. DH and I have never had the same account value in our individual accounts, because I put different investments in each account.

CJN486
Posts: 7
Joined: Sat Jan 03, 2015 10:37 am

Re: Where to park Emergency Fund in Roth IRA

Post by CJN486 » Thu May 18, 2017 12:30 pm

Thanks everyone for the reply's. I have more clarity that it is a good idea to max out the Roth, given the circumstances. Therefore I am thinking I will keep it simple and just use my current target date fund vehicles I already have for the remaining amount since it includes bonds (albeit not much.)

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