How to Use My Roth IRA as an Emergency Fund
Saving for retirement with a Roth IRA is a wise choice for investors both young and old. These accounts provide tax free withdrawals at age 59 1/2 and earn compounded interest. However, there are situations that may arise in one's life that requires you to withdrawal money and use your Roth IRA as your emergency fund. Here are the steps to take to learn about those rules and process for taking money out.
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Instructions
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Analyze your finances and budget in detail before you take early distributions from your Roth IRA. Proper budgeting, forecasting, and savings may assist in using alternate methods for getting the money you need. If you find yourself in the position where these funds are needed, proceed to step 2.
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Contact your accountant or financial advisor if you have one. Advise them that you plan on withdrawing funds from your Roth IRA and discuss the tax consequences this will have. Using your Roth IRA as an emergency fund and withdrawing early will cost you 10% on your earnings. For example, if you plan on taking $1000 of your earnings out of your Roth IRA it will taxed by the IRS $100. However, you can take out any direct principle contributions you made at any time without penalty.
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If you don't have an accountant or financial planner to discuss your situation with, visit the IRS website (link below) to read the most up to date policies for early distribution penalties. For example, using your earnings for higher education expenses or a first time home purchase can also eliminate any tax penalties.
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Contact the bank or other financial institution that your Roth IRA account is held. Inform them of your withdrawal and they will transfer the funds out of the account to your own bank account or send you a check after you fill out the necessary paperwork.
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Tips & Warnings
Stay up to date with the latest IRS laws and rules. These can change quickly so speak to a professional or use the IRS website to research.
