Roth IRA as Emergency Fund

bmo88 · May 2015

Just wanted to run an idea by everyone since all of you have been so helpful thus far. As I mentioned in a previous post, we are simultaneously building up our emergency savings to 6 months expenses while saving for retirement and paying off $54,000 in debt. In an effort to maybe capitalize on investing, but still have a cushion, I am considering contributing to a Roth IRA instead of continuing to shovel the funds into our high interest savings account. Here is our situation:

Currently have $12,000 in high interest savings account. That is 4 months emergency expenses.
Contributing 15% to retirement through PERA and company 401k.
Making large monthly payments to debt to eliminate it ASAP.
Considering putting savings into Roth IRA until both max contributions are made (up to $11,000 for joint annual) until we reach 6 months expenses ($18,000)

Pros of Roth IRA as Emergency Fund:

Tax free growth on interest
Semi-Liquid funds--Accessible funds if needed, can avoid 10% penalty as long as the interest gains are not withdrawn before 59 1/2
Serves also as retirement savings

Cons of Roth IRA as Emergency Fund:

If necessary to tap into for emergency, cannot go back and make up for the contribution
Fund balance can potentially depreciate depending on how the market performs

If a dire emergency were to occur, we would obviously tap into our savings account first and then Roth IRA if necessary.

What are all of your thoughts on this? Is anyone currently doing this?

AprilZ81 · May 2015

Right now our emergency funds consist of a mutual fund and some non-retirement stocks. We have a chunk of money in a savings account that is earmarked for a bathroom remodel as soon as I find a new job.

We would only tap into our ROTHs if it was a true emergency and we had eaten up all other options. If you take the money out you lose those funds as a vehicle to make more money even if it is "penalty free".

Keep in mind that if there is an emergency with your house your insurance will step in, if you total your car your car insurance will help out and with a medical emergency you should have an out of pocket max each year.

Our e-fund is only about $10k, which would cover the bare essentials for 3 months and is really just in case DH would lose his job. He has recruiters calling him weekly so we doubt he would ever be out of work for longer than a month before finding something new.

E-funds shouldn't be massive stores of cash in my opinion, just enough to cover a few months of being out of work, insurance deductibles or replacing something insurance doesn't cover, like an HVAC system.

formerlyGDaisy09 · May 2015

AprilZ81 said:
Right now our emergency funds consist of a mutual fund and some non-retirement stocks. We have a chunk of money in a savings account that is earmarked for a bathroom remodel as soon as I find a new job.

We would only tap into our ROTHs if it was a true emergency and we had eaten up all other options. If you take the money out you lose those funds as a vehicle to make more money even if it is "penalty free".

Keep in mind that if there is an emergency with your house your insurance will step in, if you total your car your car insurance will help out and with a medical emergency you should have an out of pocket max each year.

Our e-fund is only about $10k, which would cover the bare essentials for 3 months and is really just in case DH would lose his job. He has recruiters calling him weekly so we doubt he would ever be out of work for longer than a month before finding something new.

E-funds shouldn't be massive stores of cash in my opinion, just enough to cover a few months of being out of work, insurance deductibles or replacing something insurance doesn't cover, like an HVAC system.

Agreed, with all of this, especially bolded. Our current goal for our e-fund is to have our family OOP maximums for our medical insurance covered. That is enough we could get by for several months if we were to both loose our jobs. when I figure our monthly expenses I exclude all extras like hair cuts (I have tools to cut H's myself), eating out, fun money, the dog's agility training, and I scale back our grocery budget. If we were to have a true emergency we could and would cut all that spending and would scale back our grocery shopping to include a lot more pasta, rice, and beans, and a lot less meat and other more expensive choices.

We do have savings accounts earmarked for vacations, appliance replacement/repairs, home renovations/maintanence, and electronics...those funds would also be available, in addition to our general savings account we're aiming to get to our OOP max. We would have to experience something truely catastrophic to deplete all those funds, multiple serious illnesses, loss of two jobs, etc to have to deplete all those funds for things insurance wouldn't cover.

You're already contributing 15% to retirement, so I don't see a huge problem investing some of your 6 month e-fund in Roths, it's unlikely that you would need to use it.

als1982 · May 2015

I think $12,000 or four months of expenses for an e-fund is more than plenty. Especially since you could, if needed, pause both your debt payoff and retirement contributions in the event of a true emergency.

We don't keep much of an e-fund now, but have settled on holding back three months of expenses if/when we get pregnant. (H would be fine with $1,000 and I wanted six months, so we compromised at three.)

hoffse · May 2015

I think that Roths are great options for retirement. I'm kind of a Roth cheerleader.

It's a terrible idea for an emergency fund. Don't tap into Roths for emergencies unless it's truly a last resort.

In general I agree with the others regarding how much cash you need sitting around in an emergency fund. I don't think you need to stockpile huge amounts of cash that aren't giving you a great return, as long as you have enough liquid for emergency repairs, insurance deductibles, etc. I have actually toyed with the idea of building a CD ladder for our e-fund, which is something we might start working on once our big house improvements are completed.

cbee817 · May 2015

I think it's a good idea to open a Roth, but I would keep your e-fund as is. There are a ton of things that can go wrong with a house that your insurance won't pay for and if you want to TTC in the next 2-3 years, I think it's good to have $ set aside. With 2 kids, we have about 10 months of expenses sitting in a savings account and a CD.. sure it's not making a lot, but if anything happens, the money is there for our family. We also fully fund our Roth accounts (going on year 3), contribute to retirement, and have 529 plans set up for the girls. The only debt we currently have is our mortgage although DH is looking into getting a new car once DD#1 is done with day care in the fall.

@hoffse - CD ladder looks interesting.. might need to look into that more since we have quite a bit of $ in our current CD that is maturing in August.

vlagrl29 · May 2015

I would not do a Roth as an e fund. Maybe a money market instead. our e fund is only in a savings account for easy access.

AprilZ81 · May 2015

Money Market would be a great option, unless the rules have changed... You can write a check out of a money market fund just like a regular checking account and it generates a larger interest rate.

Xstatic3333 · May 2015

If I were you I'd probably leave the $12,000 as-is (good job btw!) and start contributing to a Roth instead from this point forward. For us, $12,000 would be a comfortable e-fund level.

bmo88 · May 2015

Thanks for the input so far everyone!

I would really like to have more than 4 months reserves because DH and I both work at the same company and while I am pretty sure our company won't shut down tomorrow, it's a start up and still comes with some risk.

I think we will move forward with investing in Roth IRAs with the intention of never drawing from it unless absolutely necessary. I have looked into Money Market accounts, but the interest rates aren't much higher than the high interest savings account. Though we might consider putting some funds into CD accounts.

AprilZ81 · May 2015

Before you jump on the ROTH idea be sure to think through your total retirement contributions. If you are already at 15% and then you start maxing out ROTHs you may be contributing "too much". Professionals recommend 10-15% of your income to retirement funds.

I would maybe look at some mutual funds that will generate good returns without being earmarked for retirement and thus avoiding penalties and not being subject to any contribution limits.

Roth IRA as Emergency Fund

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