Smart Reasons to Save, Use and Invest Money

Roth IRA Emergency Fund

 

I don’t have a traditional emergency fund, so I decided once my mortgage is paid off, I’m going to use part of my previous mortgage payment savings to fund into my Roth IRA as an emergency fund.

My Roth IRA previously was used just for active trading in a few high beta stocks.  This was my “play the market” fun money.  I had a great time with it, and I did okay until the “Great Recession” hit.  Most of my Roth IRA money was and still is in solar and Chinese stocks.

Roth IRA Emergency Fund Plan:

I’m going to take 25% of the money that I’ll be saving by having my mortgage paid off in February 2010 and start to funnel it into a money market or bond fund in my Roth IRA.  After a few years, when the fund hits $15,000, I’m going to change my percentage ration to a smaller ratio.

Why am I doing this, you might ask?…

The Money Reasons 🙂

  1. Any interest or dividend received grows Tax Freeeeeee
  2. If I sell a security, and incur capital gains, they are also Tax Freeeeeee
  3. I can withdrawal my contributions to the Roth IRA without any penalty.
    1. Since the money has already been taxed, no taxes apply!
    2. No age limit applies to the contributions either!!!
  4. It’s simple to get to the money!  As long as I don’t tap into the earnings…

I will have to make sure if I withdrawal money in an emergency to only withdrawal what I contributed.   So I keep track of my contributions in a separate spreadsheet.

I’ve seen some advice about this not being the best route to take because of lost future gains.  But currently, the amount that I’ll be contributing will be above and beyond what I’m currently contributing.  By doing this, I also get to take advantage of a great legal tax loophole!  Plus I’m max out my Roth IRA contribution amount allowed by the government (currently 5,000 + inflation).

Using a Roth IRA is one of the only ways to get the interest rates that so many books and blogs reference.  After all, regular brokerage accounts get hit with taxes…

What  do you think of my plan?

MR

 

4 Responses to Roth IRA Emergency Fund

  1. I am a big fan of the Roth and I haven’t come across anyone using it as an amergency fund although I am sure there are people doing it. Making withdrawals (just the principal) isn’t hard but if you want to withdraw the interest then it has to be after five years o establishing the account and only for qualified things like purchase of a house or education.

  2. Yep, the Roth IRA is one of my favorite devices created by the government. IMHO, everybody should have one.

    The biggest limitation is that you can only contribute up to $5,000 this year (unless you turn 50 this year, then you can contribute an extra $1,000 for a grand total of $6,000). 🙂

  3. The $5k limitation is one thing I really hate about the Roth. That is such a paltry sum. I know that it is supposed to increase with inflation but if you start so low even if it increases with inflation the increased amounts will be lower too. I really wish they would increase the limit.

  4. Right, and to top that, if inflation is 3%, then that’s only a $150 dollar increase… how horrible.

    Once my kids get old enough to work, I think I’ll fund a Roth IRA for them. So, I’ll let them keep the money they earn working, then put the amount they earned (or maybe a percentage of what they earned) in a Roth IRA for them from my own pocket…