make Roth priority over EF

[KTP]

This is just for those of you who are eligible but do not contribute to a Roth because you don't feel you have enough to fund it *and* build up your EF.

Use the Roth as your EF. You can take out your contributions at any time, tax and penalty free. You can have the Roth investments as safe as your EF would be (even keeping the Roth money in a money market if you so desire).

While you don't makea lot of returns in the average EF, it makes sense not to pay any of it to the gov.

[TheBudgetCoach]

Good knowledge. Bad personal finance advice.

Distinguishing an emergency fund and a long term retirement account are important. If for no other reason, than to ensure you don't cheat yourself out of long term earnings. You will have emergencies in life. Why would you knowingly place funds in a long term retirement account with that understanding? You're setting yourself up for hassle. The purpose for having different accounts is to designate certain goals for different groups of funds.
You don't want to be waiting for approval and a check in the mail from your Vanguard retirement account if your transmission goes out. My 2 sense.

[disneysteve]

I understand your point KTP but I tend to agree with TheBudgetCoach. I don't like the idea of viewing a retirement account as an emergency fund. Far too many people tap their retirement accounts, whether it be a Roth or a 401k, for reasons other than retirement and then find they are underprepared for retirement. The stats on the number of people who cash out 401k accounts when changing jobs and the number of people who take out loans from their 401k accounts is alarming. People need to just forget about the fact that there are ways to access that money prior to retirement. Pretend it is locked away and can't be touched until you retire and not a day before that.

[KTP]

I sort of agree with both of you. As a counter arguement though, it could be good to have the emergency fund semi tied up in a Roth IRA account...perhaps with instant transfer to your bank account set up (Fidelity and Vanguard do that for free). The theory is the emergency fund is, well, for emergencies. Not the type of emergency of "wow, that 42 inch 3D tv looks super cool...I should tap into my EF and replace my 40 inch plain LCD tv." More of the type of emergency of a job loss, unexpected medical bill, car repair. Most of these can be floated on a credit card for 25 days if you really think it would take 25 days to do a bank transfer from Vanguard to your checking account. (For me it takes 1 or 2 days).

Perhaps while rates are so low it doesn't really make a difference. If you are in the 10% tax bracket I guess it wouldn't make much difference either.

[TheBudgetCoach]

Ktp

You have a good attitude. My opinion, being a simple person, and being married for 13 years with 3 kids, is that being too overly-complicated with my finances is that it tends to get you into more trouble than save you in the end. I am debt free, moving my retirement along nicely, and reducing my mortgage nicely. I am a profitable business owner. I am a huge fan of Dave Ramsey because of the common sense philosophy that he advocates. Being an independent thinker, I do not agree with his investing advice and have conveyed that to him (I'm an advocate of Index Funds). Your question is one that should only be answered by you, especially because it's called Personal Finance for a reason. We all thrive (or not) on our own decisions. Good luck to you.

[jpg7n16]

Perhaps while rates are so low it doesn't really make a difference. If you are in the 10% tax bracket I guess it wouldn't make much difference either.

The lower the tax bracket, the more favorable the Roth becomes.


I just think too many people try and make their EF into a multi-tasking EF. Where "not only is it my EF, but it also doubles as _______"

• a Retirement account (Roth can withdraw contributions if I need it)
• an extra payment on my home (can get home equity loan if I need it)
• a headstart on paying down my credit card (saves interest, and if I need it, I'll just charge it to the card)
• etc.

An EF should be money, held in cash (aka bank account), solely for the purpose of protecting you against an emergency. Let your Roth be for retirement, and strive to get/stay out of debt.



You definitely seem like someone who should keep a 3 month EF, and no more than that. (anywhere 3-6 months is okay) You (the OP) should move any amount over that into a different investment vehicle (Roth, brokerage, 529, etc.)

[littleroc02us]

When you have a true emergency it's because it's an emergency. If my car busts on the side of the road and I have to wait for the check to come from my roth IRA, it makes no sense. Keep your EF liquid in a Money Market account and don't touch it unless it's an emergency.

[kork13]

When you have a true emergency it's because it's an emergency. If my car busts on the side of the road and I have to wait for the check to come from my roth IRA, it makes no sense. Keep your EF liquid in a Money Market account and don't touch it unless it's an emergency.

In fairness, I honestly can't think of an emergency that could possibly occur that I couldn't use a credit card, or simply delay paying a few days, until the 2-3 days it would take to sell investments (in a Roth, taxable account, or savings bonds) and get the necessary cash transferred to an account I can more readily access. That's actually why I'm only keeping 3 months in expenses in a liquid cash account. If there's anything THAT catastrophic (to the tune of, say, $10k+), there's gonna be time to get access to cash I have in other vehicles.

At the same time, my Roth IRA is not even on my list of options for getting at saved money. I just wouldn't be comfortable drawing from it.

[KTP]

I think people are not really getting what I was saying.

I meant the post for people who are currently not contributing to a Roth because they have made establishing an EF for 6 months of expenses a higher priority.

Advantages to using Roth as your EF (for those who would not otherwise have started a Roth):

You keep all your earnings, Uncle Sam gets zilch.

You can withdraw your orgiginal contributions tax free, penalty free at any time for any reason

Your account is protected against bankruptcy action (this seems like a biggie that everyone ignores)

[jpg7n16]

I think people are not really getting what I was saying.

I meant the post for people who are currently not contributing to a Roth because they have made establishing an EF for 6 months of expenses a higher priority.

No we pretty much get exactly what you're saying. "Build up an EF inside your Roth, using a Money Market fund inside the roth, and use that as your EF instead of an EF held outside the Roth."

I get it, I just disagree.

Advantages to using Roth as your EF (for those who would not otherwise have started a Roth):

You keep all your earnings, Uncle Sam gets zilch.

With MM funds earning 1%, and a value of an EF that should never really get over $20k (except for high income earners that don't qualify for a Roth) - but most should be around 10-15k...

Total interest earned would be $100-200 saving most people $25-50 on taxes for the year.

Just to be realistic about how much this tactic saves.

It saves less for the case you're talking about. Someone trying to build up an EF, so they don't even have $10k yet. Maybe only $0-5k. So they'd save like $10/year. (which may also get eaten up by account maintenance fees due to such a low balance)

You can withdraw your orgiginal contributions tax free, penalty free at any time for any reason

This isn't really an advantage since I can do the same with a checking account.

So for someone who is trying to build their EF (which I'm fairly outspoken about NOT needing 6 months in every case), say you were building your EF - and you have an emergency. So you need to withdraw money.

In a checking account, you withdraw the money - or transfer online - easily, no hassle, no fees. (in most cases)
From a Roth, you must transfer out of the retirement account to your personal account, and are now subject to minimum balance fees that would eat away any earings you made so far.

Your account is protected against bankruptcy action (this seems like a biggie that everyone ignores)

That's cause it's irrelevant.

You should rather withdraw money from your EF, than declare bankruptcy.... so you should withdraw your contributions from the Roth, in the attempt to ward off bankruptcy. And if you withdraw the money to help try and avert the emergency that is leading to bankruptcy, it is no longer in a retirement account, and thus - no longer protected.

This "biggie" actually only helps someone who is facing a huge lawsuit that leads to bankruptcy. Which isn't that common.

Bankruptcy from debt burden? You should have withdrawn the EF rather than go into debt.
Bankruptcy from medical bills? You'd withdraw the EF to help pay medical bills.
Bankruptcy from loss of job? You'd withdraw the EF to support yourself while looking for work.



So like we're saying, we feel a Roth should be for retirement money (and should be invested appropriately for retirement goals to take full advantage of the tax benefits) and an EF should be held separately in a highly liquid account.

[littleroc02us]

I get what your saying also, but I disagree. An EF is for emergencies and not to be touched. It isn't an investment or anything else. I'm not going to use a credit card or take out my IRA.

[MonkeyMama]

KTP - I agree with you!

You have to be financially disciplined and have a healthy definition of emergency, is all. But there are numerous ROTH strategies that make a lot of financial sense.

The ROTH is, by design, more than just a retirement fund.

[Snodog]

I agree also KTP and its what I personally would do. Why pay tax when you don't have to?

For those that disagree try thinking of the Roth as more of a tax free investment vehicle rather than strickly a retirement account.

[disneysteve]

For those that disagree try thinking of the Roth as more of a tax free investment vehicle instead of a retirement account.

If the average American was saving adequately for retirement without needing a Roth, I'd go along with that. The reality, of course, is that most people aren't saving nearly enough for retirement. Also, keep in mind that about half of all workers don't have access to a 401k so the Roth might be the only tax-free retirement vehicle they have (like me).

[Snodog]

OK after re-reading the thread (more closely this time ) I think I get why some of you are against it- You don't want people to get into the habit of taking money out of retirement funds. Im with you there. Point taken.

Like I said its what I would do and may not be right for everyone. Heck I'de sooner chew off my right arm than withdrawal from my Roth.