Using a Roth IRA as Your Emergency Fund

Using a Roth IRA as your emergency fund has its advantages and disadvantages. It can help you grow your emergency money faster than bank savings accounts, but it can also be pretty volatile as well.

For starters let’s look at the question, can i take money out of a Roth IRA for an emergency? Well any money that you put into it can be taken out, but you may run into problems if you try to pull out the interest you have made on that money.

For example if you invest 10,000 into your retirement fund and you now have 18,000 in it, you may withdraw $10,000 tax free. The other $8,000 would get hit with an early withdrawal penalty as well as taxes.

Depending on your situation, you may be able to withdraw the full $18,000 penalty and tax free. You just have to fit into one of these categories.

1. You are over 59 ½ and has had the account for at least 5 years

2. Disabled and need the money

3. Growth such as, buying a new home

4. You died, in which case your benefituaries get the money

Fitting into one of these lets you take money without having to pay taxes and penalties on it. So, now that we know the rules, what are the pros and cons of using a Roth IRA as your emergency fund?

Pros

1. Higher Growth over time

Chances are money in a Roth IRA is going to grow much faster than money in a Savings account. So, if you don’t need it for years it could be the best place to stick it.

2. Special Rules

There are all sorts of rules that let you use your IRA in emergency situations. This fits your plan perfectly.

3. You can have a Roth IRA with other retirement accounts

For instance you can have a 401k and a Roth IRA. This lets you have two different accounts, one for retirement and one for emergencies.

Con

1. Volatile Market

The market can be volatile, especially in the short term. You may deposit $10,000 into your account only to have $5,000 6 months later. The earlier you are going to need this money the bigger a problem this becomes.

What to do?

Ultimately this question is up to you to answer. But it may be a better option than just keeping your money lying earning little or no interest.

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