Use emergency fund to max out the IRA?

**littleroc02us** · 07-08-2010, 07:46 AM

Emergency funds are for emergencies. Don't mess with it.

**kork13** · 07-08-2010, 08:08 AM

You have plenty of time between now and next April to max it out. DCA it over the next 9 months and tell your advisor to relax. Don't buy into any "now's the time to buy" pitches, because nobody knows anyway.

**buildmybudget** · 07-08-2010, 08:08 AM

On one hand you're lowering your taxes and adding to your retirement savings and on the other, helping mitigate any fallout should anything bad happen. I think both are good choices and it just depends on which you think is a higher priority right now. If you're in an excellent job situation and have adequate insurance, I would think you might be able to slow down on your EF in lieu of taking advantage of the IRA this year.

**MonkeyMama** · 07-08-2010, 08:23 AM

PErsonally, I would decide next April. EF would come first. If you can fund the IRA next April (for 2010), it may be a good compromise. Of course, I would consider your situation come April (job stability, likelihood of impending emergencies, etc.). But, it may not be the worst to fund an IRA next April and push back your EF goal by a few months.

I think 10% to retirement is quite ample though, if you want to reach your EF goal first, and skip the 2010 IRA contribution.

Either way, you don't have to decide today.

**jIM_Ohio** · 07-08-2010, 08:26 AM

If IRA is maxed by years end, its a wash anyways.
If IRA will not be maxed, tap into EF enough so IRA is maxed.

**disneysteve** · 07-08-2010, 10:17 AM

What percentage of your gross income are you currently saving? How much do you add to your EF each month? How much do you currently put in your Roth each year?

Although I do not support this view, keep in mind that contributions to a Roth can be withdrawn at any time for any reason, so some people and advisors consider it to be part of the emergency fund.

**Snodog** · 07-08-2010, 12:48 PM

Originally posted by jIM_Ohio View Post

If IRA will not be maxed, tap into EF enough so IRA is maxed.

I agree. You can invest the money safely and if worst comes to worst and you have to withdrawal it you are no worse off. However the most likely case is you will never need the money and it grows tax free. I should add that I am assuming this is a roth IRA.

**Shaabenanizer** · 07-08-2010, 01:05 PM

Thanks for all the advices, I think I will wait several months to see if I should max out on the Roth or not.

DisneySteve, 6% of my gross income goes into my savings/EF. My contribution to my Roth is a pitiful $1050/year for the last 5 years.

**disneysteve** · 07-08-2010, 01:30 PM

Originally posted by Shaabenanizer View Post

DisneySteve, 6% of my gross income goes into my savings/EF. My contribution to my Roth is a pitiful $1050/year for the last 5 years.

You said you put 10% into your retirement plan. Another 6% goes to savings/EF. So you are currently saving 16% of income. That means you are not yet saving 15% for retirement, which should be your goal.

I would work on trimming your budget so that you can save 15% for retirement and 5% for other goals, a total of 20% of gross.

**parafly** · 07-08-2010, 02:00 PM

An $18K emergency fund is fairly large. That would give you $3K per month for six months, which should be plenty unless your monthly expenses are abnormally high. I don't have all the details, but I'd be willing to bet that you could make due with $3K per month if you trimmed your expenses as much as possible.

I would start monthly contributions toward your Roth to reach the max of $5K by 04/2011. Don't do it in one lump sum as dollar cost averaging is your best bet. Chances are that you will not need more than $18K in an emergency, and as others have mentioned, you could view your contributions toward your Roth as emergency savings in a worst case scenario.

**disneysteve** · 07-08-2010, 02:06 PM

Originally posted by parafly View Post

An $18K emergency fund is fairly large. That would give you $3K per month for six months, which should be plenty unless your monthly expenses are abnormally high.

Originally posted by Shaabenanizer View Post

[FONT="Arial"]My saving account/emergency fund is currently $18,000 which I hope to get it up to $25,000 by mid 2011 and then I will have 6 months of living expenses.

parafly, OP stated he needs 25K for a 6-month EF, so 18K is about 4-1/3 months worth of EF.

I wouldn't say that monthly expenses greater than 3K/month are abnormally high. You need to have some context for that. It all depends on your income and your debt.

**parafly** · 07-08-2010, 02:19 PM

True, but unless you are living a very extravagant lifestyle, $18K is a good chunk of money and should be able to keep you afloat for a while. Besides, the general rule of thumb is 3-6 months emergency fund so he is already in that range.

Roth contributions can be withdrawn penalty free at any time. If the OP experiences a worst case scenario and needs more than $18K, he will have access to his Roth contributions as if they were part of his emergency fund. Chances that the OP exhausts his entire emergency fund and needs to dip into Roth contributions are very low, but always an option.

This is a basic risk vs. reward scenario. There is a very high reward for maxing out your Roth vs. a small risk that you need more than $18K in an emergency. The small risk is negated when you factor in that a Roth contribution can always be withdrawn without penalty.

If the OP had only one month worth of emergency fund, I would be singing a different tune, but he looks to be in good enough shape to max out his Roth with minimal risk.

Of course, this is all JMO, and he should do whatever makes him most comfortable, but each year lost in maxing out a Roth makes a very significant difference in the end.

**disneysteve** · 07-08-2010, 03:01 PM

Originally posted by parafly View Post

True, but unless you are living a very extravagant lifestyle, $18K is a good chunk of money and should be able to keep you afloat for a while. Besides, the general rule of thumb is 3-6 months emergency fund so he is already in that range.

18K is a lot of money, but 3K/month really isn't all that much for expenses. If you have a 300K mortgage at 5%, the payment alone is $1,600/month. Add in taxes and insurance and that's probably 3K/month right there. And that's before utilities, gas, food and other living expenses. Throw in a car payment or student loan payments and you'd be well over 3K. I think a great many people have monthly expenses that exceed 3K.

Roth contributions can be withdrawn penalty free at any time. If the OP experiences a worst case scenario and needs more than $18K, he will have access to his Roth contributions as if they were part of his emergency fund.

Agreed. I said the same thing above.

There is a very high reward for maxing out your Roth vs. a small risk that you need more than $18K in an emergency. The small risk is negated when you factor in that a Roth contribution can always be withdrawn without penalty.

Exactly.[/QUOTE]

**jpg7n16** · 07-08-2010, 03:10 PM

Originally posted by littleroc02us View Post

Emergency funds are for emergencies. Don't mess with it.

I think this post said it all.

You need a 3-6 month EF. You are already there. Are you in a particularly unstable field of work so that you need 6 months?

I think 4 months is fine. Stop building EF, don't lower it, and start building retirement accounts.

Use emergency fund to max out the IRA?