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Is a Roth IRA a good place to put emergecy funds?

I am a 50 year old male who has an emergency fund in an online savings account. I have over six months expenses in this account. I was going to add to this account and was wondering if I should consider placing additional funds into a Roth mutual fund. I currently have accounts with T Rowe Price. If you agree this would be a good idea please recommend a fund. If not, please make another suggestion.

Mar 03, 2012 by Thomas from Ronkonkoma, NY in  |  Flag
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8 votes

As Paul said, it wouldn't be reasonable for anyone to suggest specific funds, or even whether a Roth IRA may or may not be a suitable addition to your emergency funds. We simply don't know enough about your situation.

However, it's a good question and worth understanding what limits you have on accessing the money you've got in a Roth IRA. In general, any direct contributions you make to your Roth IRA may be removed without taxes or penalty. The downside of removing the money from your Roth is that you are losing all that potential future tax-free growth and you have a limited amount of money you're allowed to put into a Roth. Pulling it back out is a lost opportunity. Nevertheless the ability to pull that money out without taxes or penalties does make it somewhat more liquid/accessible than money tied up in a traditional IRA or an employer's 401(k).

Note that money in a Roth IRA which is the result of converting from a traditional IRA, rather than direct contributions, has different restrictions (mainly a delay before you may access the money without penalty).

And further, note that the growth from the contributions is not available penalty- or tax-free (until you've reached retirement age, etc). So if you put, say, $5000 into your Roth IRA and it grew to $6000, you may pull the $5000 back out, but the additional $1000 must remain else be hit with taxes and penalties. There is a list of "ordering" rules regarding what money coming out of a Roth IRA is considered to be (regular contributions, conversion, earnings).

See IRS Pub 590, Ch. 2 for more details. Here's a link: http://www.irs.gov/publications/p590/ch02.html

1 Comment   |  Flag   |  Mar 05, 2012 from Palo Alto, CA

I understand that you do not have my complete picture. However as I mentioned, I already have better that six months income in an FDIC online MM account. I also have a rollover IRA and Roth outside of work and a 401K IRA and Roth at work. I would expect in future to have a lower income. The money I wish to place in this new Roth would be new additional money and be in addition to my existing accounts. I am not looking to hit a home run with these monies, more to have it there should I need it before or hopefully during retirement. Just to do better than the <1% I currently get in that MM account. Thanks for your reply.

Flag |  Mar 05, 2012 near Ronkonkoma, NY

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4 votes

The questions you're asking seem simple on the surface. Yet, the answers require a closer look at your situation. You probably wouldn't expect your doctor to prescribe a treatment without an examination. Same principles apply here. I suggest you contact a CFP professional near you. If you're concerned about cost, contact the local chapter of the Financial Planning Association and ask about their pro bono and other public programs.

1 Comment   |  Flag   |  Mar 05, 2012 from San Diego, CA

Thank you Paul.

Flag |  Mar 05, 2012 near Ronkonkoma, NY

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Thomas - Paul is correct: without more information about your financial circumstances, your question cannot be answered definitively. Some of the issues you will want to consider:

(1) have you had your ROTH account for at least five years? If not, then you would need to be prepared to live with some limitation on withdrawals. While in most cases you can withdraw any amounts contributed to a ROTH (some exceptions apply), you cannot access any of your earnings without penalties unless you have had the account for five years.

(2) do you have an idea about the level of risk you are prepared to take on your new contributions? If these additional contributions are intended to be additional emergency funds, as the title of your question suggests, you will want low risk investments that are not expected to fluctuate too much. If the contributions are for long-term savings, then you may be willing to assume more risk, which will affect your choice of funds.

The type of investments (equities, fixed income, cash) is probably more important than the specific funds, and you will want to ensure that the risk you take is in line with your needs and goals.

1 Comment   |  Flag   |  Mar 05, 2012 from San Francisco, CA

James, Thanks for your response. Please see my reply to Paul above. But I have not had my existing Roth's for longer than 5 years. Most of the money I am currently investing is via my work 401K. As I mention above, I wish to set up a new Roth in addition to my existing accounts.

Flag |  Mar 05, 2012 near Ronkonkoma, NY

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