Emergency Fund in Roth?

[WVRick]

After you hit 59.5 and have met the 5 year Roth rule, is the Roth the best place to keep your emergency fund? My thought is to keep it here to avoid taxes on the interest (assuming fixed income). I have not seen this mentioned anywhere, so I wonder if I am overlooking anything. Of course, this assumes you have spent down most of your taxable accounts which may or may not be advantageous for long term taxes.

[This thread has been moved to the “Personal Finance (Not Investing)” forum. Moderator Pops1860]

[steadyosmosis]

Many people have their Roth IRA as emergency fund (EF), even when younger than age 59.5.
My EF (aka fixed income) is mostly in my traditional IRA, and I am younger than age 59.5.

[Pops1860]

Actually, you can remove your contributions (but not any earnings) from your Roth IRA at any time, for any reason, without tax or penalty. Some people (like wife and I) consider a Roth IRA serves as an 'emergency fund' from the time of the first contribution, for this reason. Saving the $$ for retirement is great to do, but if you need the $$ sooner, it's available (again, contributions only).

We help our grandkids who have jobs during school years set up Roth IRAs for exactly this reason. We match some of their earnings while in college with 'matching gifts to be put in a Roth IRA'. This gives them some exposure to learning about investing and retirement accounts at an early age, but the 'gift' is still available to them at any time if they choose to take it out of the IRA (no strings attached, as we say, just a learning technique).

[MillennialFinance19]

I've always viewed my Roth as my "extreme circumstances" emergency fund. Now that I've gotten a little older (and hopefully wiser because of this site) I did start contributing to a HYSA as a sinking-type of fund. Will cover car purchases, vacations, and if needed, emergency expenses. But yes, I think it's a fine use of a Roth IRA.

[runner3081]

I do this for my HSA. Have >$15K of medical expense receipts, can pull tax free whenever needed.

[JBTX]

I’d consider my Roth to be my “Emergency - Emergency fund”. I’d first want sufficient liquidity, and a Roth would be an absolute last resort.

[CuriousGeorgeTx]

It can be difficult to get funds into Roth, so the idea of withdrawing from it in an emergency is not attractive to me if there are alternatives.

I have our Emergency Fund in my IRA (currently in SGOV). If we were need to draw on it, I would sell our equity fund (VT) in taxable to raise the needed cash while making a tax equivalent offsetting transaction in my IRA (sell SGOV to buy VT).

I see the following advantages with this approach:
1) reduces interest that is taxed as ordinary income
2) long term, having lower yielding asset in IRAshould reduce RMDs (which in may case are going to be more than we need) and increase LTCG which may never be paid due to basis step up upon death.

The biggest disadvantage is that it is more complicated, but true emergencies are rare, so I’m OK with that.

[Hyperchicken]

I'm surprised no one posted this link to Bogleheads wiki yet, so here it is:

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

[_nvrltthmknwyrnxtmv]

The pitfall is if you actually use the money, you withdraw contributions, but you can't "recontribute" them later unless you have unused contribution room that same year. Can take it but not put it back. But yes, Roth should be maxed out before funding a money market...

[WVRick]

I'm surprised no one posted this link to Bogleheads wiki yet, so here it is:

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

Thanks all. I guess I need to go through the Wiki further.

New to the forum, but have mostly invested like a Boglehead since I started. I am looking at doing tIRA to Roth conversions and/or tIRA withdrawls as my income allows starting next year, and thought why would I put the EF into a taxable account when Roth would fit the bill?

[MathWizard]

When using your Roth as an emergency fund before age 59 1/2 or before
having a Roth for 5 years, keep track of your Roth basis. You'll need that
for form 8606 part III when you withdraw contributions.

[blortchplop]

When using your Roth as an emergency fund before age 59 1/2 or before
having a Roth for 5 years, keep track of your Roth basis. You'll need that
for form 8606 part III when you withdraw contributions.

Sorry to quibble, but I think you meant, "When using your Roth as an emergency fund before both age 59 1/2 and having the Roth open for 5 years..."

My Roth has been open for well over 5 years, but I still have to track the basis since I'm younger than 59 1/2.

Is keeping copies of 5498 forms sufficient to track the basis (contributions)? Is there a better or more preferred way?

[MathWizard]

When using your Roth as an emergency fund before age 59 1/2 or before
having a Roth for 5 years, keep track of your Roth basis. You'll need that
for form 8606 part III when you withdraw contributions.

Sorry to quibble, but I think you meant, "When using your Roth as an emergency fund before both age 59 1/2 and having the Roth open for 5 years..."

My Roth has been open for well over 5 years, but I still have to track the basis since I'm younger than 59 1/2.

Is keeping copies of 5498 forms sufficient to track the basis (contributions)? Is there a better or more preferred way?

I meant OR.

To withdraw earnings from Roth without earnings being taxed, you need
age > 59 1/2 AND first Roth opened at least 5 years ago,

the logical negation of that statement is

age < 59 1/2 OR first Roth opened less than 5 years ago.


If the earnings are taxable, the IRS needs your basis which is reported on form 8606.

You are correct that copies of 5498 forms are the way to do this.
If you can keep track otherwise, that is probably sufficient. I assume that
the IRS probably knows your basis anyway.

[blortchplop]

I meant OR.

To withdraw earnings from Roth without earnings being taxed, you need
age > 59 1/2 AND first Roth opened at least 5 years ago,

the logical negation of that statement is

age < 59 1/2 OR first Roth opened less than 5 years ago.


If the earnings are taxable, the IRS needs your basis which is reported on form 8606.

You are correct that copies of 5498 forms are the way to do this.
If you can keep track otherwise, that is probably sufficient. I assume that
the IRS probably knows your basis anyway.

You're right; I misread it. Think I took the or as exclusive. Can I blame the English language?

I hadn't kept records since my Dad opened the Roth IRA for me when I got my first summer job in high school and went to look for old 5498 forms. The IRS records went back 10 years and stopped. Maybe they keep longer than that internally, but 10 years is the oldest I was able to download when logging in to the IRS website.

[arcticpineapplecorp.]

The pitfall is if you actually use the money, you withdraw contributions, but you can't "recontribute" them later unless you have unused contribution room that same year. Can take it but not put it back. But yes, Roth should be maxed out before funding a money market...

Ideally a Roth should have stocks, not fixed income (for greater growth),

so another pitfall is if you have an emergency and the stocks in your Roth IRA are down you could be selling shares for less than you invested (depending on how soon after contributions are made).

[Eurookat]

Really stupid question but how does one prove to the IRS what your contribution is over the years. For example, let's say my IRA balance is well over $500k. I need to pull $100k out for emergency (e.g. medical bill). With a balance that high, you'd think most of it is from your contribution but how does one know not to go over?

[rkhusky]

The pitfall is if you actually use the money, you withdraw contributions, but you can't "recontribute" them later unless you have unused contribution room that same year. Can take it but not put it back. But yes, Roth should be maxed out before funding a money market...

You can put the money back if you do it within 60 days, but you can only do that once a year.

[rkhusky]

Really stupid question but how does one prove to the IRS what your contribution is over the years. For example, let's say my IRA balance is well over $500k. I need to pull $100k out for emergency (e.g. medical bill). With a balance that high, you'd think most of it is from your contribution but how does one know not to go over?

As mentioned above, Form 5498, which is also sent to the IRS every year.

[Invictus002]

Its best to use HYSA or othe similar types of accounts to hold emergency funds. A brokerage account with margin feature can also serve as an emergency fund. Worst case, use margin to borrow for the emergency and pay it back asap.

IRS limits Roth IRA contributions, maximize the opportunity to make the best out of the account, which is to let it snowball over however long you can.

[Bama12]

What about keeping your emergency fund in a T-IRA or a 401k? If you only used it if you lost your job, I know you will pay 10% but your tax would be low if you had no income coming in.

[dratkinson]

If you withdraw principal (anything) from your Roth, you'll slow growth and annoy your retired wiser self for not having created a more robust EFs plan.
--Don't put bonds in your Roth, same reasons: lower expected growth, which will annoy your retired wiser self.
--Bonds can go in taxable and tax-deferred accounts.


Idea.  Everyone needs some bonds (age in bonds), so put some in taxable, in a muni fund and use them as retirement bonds, or EFs if needed.
--See wiki: https://www.bogleheads.org/wiki/Municipal_bonds
--Suggested public library book: The Only Guide to a Winning Bond Strategy You'll Ever Need, Swedroe.

Assume you're in 22% fed tax bracket.  Compare muni TEY to taxable bond SEC yield and bank interest APY.  Higher is better.

Muni TEY (taxable-equivalent yield) = SEC yield / (1 -fed tax bracket -NIIT if applicable -state tax bracket if single-state muni)

Example.
--VBTLX (IT TBM: total bond market index fund) SEC yield: 4.43%; see: https://investor.vanguard.com/investmen ... file/vbtlx
--VTEB (IT national muni index ETF) SEC yield: 3.45%; 3.45/(1-.22)= 4.42% TEY; see: https://investor.vanguard.com/investmen ... ofile/vteb
--VWLTX (LT national muni fund) SEC yield: 3.70%; 3.70/(1-.22)= 4.74% TEY; see: https://investor.vanguard.com/investmen ... file/vwltx

Ranking the expected after-tax income produced by each bond candidate.
--VTEB's expected after-tax income should be ~equivalent to TBM's and as an ETF can be bought cheaply anywhere.
--VWLTX's expected after-tax income should be slightly better than TBM's, but it's also slightly more risky. Risk can be TLHed.

The TEY math works better in higher tax brackets.  Lather, rinse, repeat for your tax bracket ...or if you expect tax code sunset in ~2026.

A second look. TEY math misses all tax code effects: the right hand giveth (earned income tax credit, savers credit,...), while the left hand taketh away (NIIT, SS taxation,...). Tax code effects are included by creating a sample tax return for each bond candidate, after which you'll compute/rank:
   Expected after-tax income from each bond = +total income -fed tax owed -state tax owed.

Simplifying assumption. Over the long run, the bond rankings should hold as bond yields change due to changing interest rates. Meaning your bond choice(s) today should also be acceptable tomorrow. (Exception. Inverted-yield interest-rate environments temporarily boost ST bond yields; this too shall pass.)

Sample tax returns do miss the after-tax income effects of: ACA credit and IRMAA. You'll have to include those for yourself. Or not. Your choice.


Muni mileposts.  After you've built up >2yrs of living expenses in munis (retirement bonds), (1) you'll notice financial emergencies shrink to become only financial annoyances. (2) You'll also no longer need to consider your Roth as a tier of your EFs, (3) which will please your retired wiser self.



Edit. Second thoughts.