How to Begin Using a Roth Ira as Your Emergency Fund

Using a Roth Ira plan can offer many unique advantages and planning an emergency fund is just as important as saving for retirement. It is sometimes wise to begin using a Roth Ira as your emergency fund to gain a tax advantage and save for future purchases as well as retirement.

Difficulty: Moderately Easy

Instructions

1. The first step to using a Roth Ira as your emergency fund is to understand the advantages and disadvantages.

2. A Roth Ira plan has 5 main advantages: 1. Earnings made on contributions are tax free when withdrawn at age 59 1/2 for retirement. 2. Their are no age limitations for establishing and contributing to a Roth. 3. Funds can be withdrawn tax free if owner dies or becomes disabled. 4. No minimum distribution for the account owner. 5. There are no other tax free reasons for early distribution, however there are other emergency exceptions to paying the 10 % withdraw penalty including substantially equal payments, medical bills, health insurance while unemployed, and higher education purposes.

3. Disadvantages of a Roth Ira include: 1. No annual tax deductions for contributions. 2. Limited annual contribution amount 3. A Roth Ira subjects participants to earnings limitations 4. Annual earnings limits differ for single and joint filers 5. funds must be held in account for minimum of 5 years to avoid taxation and penalties.

4. By looking at the advantages and disadvantages of a Roth Ira one can see that contributing a limited amount annually allows for an emergency fund that can be taken out early for a number of reasons without taxation or penalty.

5. It is possibly a good idea if you are a high income earner who can still qualify to keep a combination of Ira's to allow tax deductions annually for offset purposes, and include a small contribution to a Roth as an emergency fund.

6. A lower income earner may want to consider contributing more to use as an emergency fund and to take advantage of the tax benefits upon withdraw.