What many people do not realize is that there are many advantages to a Roth IRA, beyond saving for retirement. One of these advantages is explained by the Chicago Tribune:
Another advantage is that, because
you’ve already paid taxes on the money you contribute, you can always
withdraw your direct contributions, at any time and for any reason,
without taxes or penalties (this has been the case since Roth IRAs came
into being in 1998 but is not well known).
For example, if you
have a Roth IRA worth $25,000, and $18,000 of it is direct
contributions and $7,000 is earnings, you can always take out the
$18,000 tax- and penalty-free. (If a bank imposes a penalty for the
early redemption of a certificate of deposit in a Roth IRA, that’s
unrelated to tax laws.)
What this means is that you can actually use your Roth IRA as an emergency fund if you need to. As long as you stick to withdrawing your direct contributions, there are no penalties, even if you have not yet reached age 59 1/2. But it is worth it to take another look before you decide that your Roth IRA would make the ideal emergency fund.
- How disciplined are you? For some people, it is easy to move from using an emergency fund for emergencies to using the fund for non-emergencies. If you are looking into using your Roth IRA as an emergency fund, carefully consider your spending habits. You need to make sure that you will limit withdrawals ONLY to emergencies.
- What’s left? Depleting your Roth IRA can lead to issues later, when you retire. After all, the Roth IRA is meant first and foremost as a retirement account. When you withdraw, not only is there less in the end, but your earnings drop as well. The more you have in there, the faster your earnings grow.
- Other options. It doesn’t hurt to look at other emergency fund options, either. A high-yield online savings account makes a good choice, as well as bond funds. Money market accounts can also provide a good place for emergency funds. (Watch out for account minimums!) Conservative investments that remain fairly liquid can be good choices for emergency funds. Consider these before turning to your Roth IRA.