Is there any reason it would be a bad idea to use a Roth IRA has an emergency fund?

[PingSpike]

I've thought about this and it seems to be the way to go, but I'm probably not considering some angles.

The money would be after tax whether I put it in a savings account or a Roth.

Yields on even online savings accounts are pretty lame right now. And then the government takes part of your lame yield. Making it super lame.

How safe are bonds? They return a similar yield to online savings accounts it seems.

If I needed too, I could withdraw my contributions without penalty in the event of say, an extended job loss. I couldn't get at the earnings, but the yield on everything is so lame I may as well wait until I'm 60 to get it. And at least the government wouldn't be taking a chunk of it every year, allowing the earnings to compound. Right?

 

[DaveSimmons]

It's best to have both of course: maxed Roth and a separate high-interest savings account with emergency expense funds.

But if you can only afford one right now, doing the Roth first makes good tax sense. You can always catch up on adding to a n emergencysavings account later but you can only make the Roth contributions year-by-year.

I'd consider putting at least half of the money in an S&P 500 ETF or index fund instead of bond funds though. The stock market might drop a bit more but long-term an S&P fund has an extremely high chance to double your growth over bond funds.

 

[Peelback79]

Isn't there mega fees to pay for dipping into your IRA early? Or does that only apply to your 401k?

 

[DaveSimmons]

Originally posted by: Peelback79
Isn't there mega fees to pay for dipping into your IRA early? Or does that only apply to your 401k?

401k and "Traditional" IRA, becuase both are funded from "pre tax" money and reduce your tax bill this year.

Roth IRA is funded with "after tax" money that does not reduce your tax bill, so the IRS lets you take out your original contributions penalty-free, but not the growth in value.

At retirement 401k and Trad withdrawals are taxed, but Roth are not -- again beacause you funded it with "after tax" money.

 

[Beattie]

I'd say it's a bad idea because an emergency fund should be secure money. Not invested in something that could lose value. I would and do put some money in a regular money market savings account for an emergency and then invest separately.

 

[DaveSimmons]

Originally posted by: Beattie
I'd say it's a bad idea because an emergency fund should be secure money. Not invested in something that could lose value. I would and do put some money in a regular money market savings account for an emergency and then invest separately.

What if you only have the money to do one?

You lose each year's Roth opportunity if you do the high-interest savings instead. You also lose part of the interest from regular savings to taxes.

A Roth IRA can invest in bank CDs if you're afraid of the fund losing value, but long-term that's not a good retirement strategy.

 

[imported_Lothar]

Compound interest is the most powerful force in the universe.
IRA > "emergency" funds any day of the week.

 

[axelfox]

I think you need liquid, quick access to the emergency fund, so that is why I wouldn't put it in a Roth IRA. You're not using emergency money to invest; it's there in case of an emergency.

 

[Injury]

define "emergency".

 

[ttown]

Nobody has mentioned the 5-year tax rule and how it would affect your "emergency" situation.

The contributions to a roth are accessible without penalty after 5 years from when the roth is established.

OP, if you haven't already started a roth ira, start one now.

If you can't afford much, make some minimal contribution to a roth so you'll be prepared in 5yrs -- and put the rest into some secure savings like CD's.
Certificate rates are horrible now, so I'd say go short-term -- and ladder them.
As rates go up and there is a feeling of a rate-peak, move your maturing CD's to longer-term.

Once you've got 6mo's wages or so saved up in cd's, then contribute the max to your roth.
When your roth get's plenty big to handle any 'emergency' -- then you can scale back on the CD's.

To your question regarding bonds... they are fairly safe, but.... If you're on the edge like it sounds like you are, i'd avoid them in favor of CD's that are fdic insured. Bonds have a historically low default rate, but it can happen. Liquidity and costs are also an issue if you are thinking about individual bonds. The market value of bonds fluctuate even if they have a steady interest rate -- so there is risk to your investment, which is a bit scary if you're thinking in terms of "emergency" funds. Bond funds would be a bit more sane, but again, the chance of losing value seems too high.

 

[LostUte]

Originally posted by: ttown
Nobody has mentioned the 5-year tax rule and how it would affect your "emergency" situation.

The contributions to a roth are accessible without penalty after 5 years from when the roth is established.

Wrong. Contributions are accessible without penalty at any time for any reason.

 

[PingSpike]

Originally posted by: axelfox
I think you need liquid, quick access to the emergency fund, so that is why I wouldn't put it in a Roth IRA. You're not using emergency money to invest; it's there in case of an emergency.

This is my theory...If something is really an emergency, I'll get the money out to deal with it, even if its a PITA. If its not really an emergency...well, making that money harder to use isn't really a bad thing.