For a while now standard financial planning advice has been that you need emergency savings that would cover 6-12 months of expenses. And of course, all financial experts stress the importance of starting to save for retirement as soon as possible. If you are trying to decide whether to concentrate on building up your emergency savings or increase retirement savings, there may be away for you to do both.
The Seattle Times discusses how you can “use a Roth individual retirement account to kill two birds with one stone, because both an emergency fund and retirement savings are critical.”
Putting money into a Roth IRA means that you will earn more than you would if that money was in a savings account and as long as you follow the rules, you will not need to pay taxes on that money while it is in the IRA.
That’s great for retirement planning, but how can the Roth IRA be used in an emergency? The flexibility of a Roth IRA is such that you can take out the money you have put in at any time. You are allowed to withdraw your contributions to a Roth IRA; what you cannot withdraw is any interest that this money has earned.
While The Seattle Times article mentions that you could use the money in a Roth IRA to pay for a wedding, travel, “or anything else you find enticing,” we would caution you not to be enticed in this way. A strategic use of your Roth IRA as emergency fund would be paying basic expenses if you lose your job. Thinking of it as bonus money to be used for experiences you want but don’t need will defeat the purpose—a comfortable retirement. Remember, if you are fortunate, you will not have any emergencies that require you to withdraw money from your Roth IRA, and you can leave the money there to earn interest.
© Clarity Financial Planning. Using a Roth IRA for Retirement and Emergency Savings is a post from: Bring Clarity to Your Finances™