Using a Roth IRA as an Emergency Fund

Roth IRAs are one of the best investment vehicles available and should be part of everyone’s portfolio. They are very easy to open and require very little money to open. But many people wonder if using a Roth IRA as an emergency fund is a good idea.

There are a lot of opinions on this subject and I guess the biggest question is what do you consider an emergency and how quickly can you get to the money. In most cases, an emergency means getting to the money in less than 24 hours and maybe sooner.

Unlike the money in a traditional IRA or an employer-sponsored retirement account — which is taxed and penalized if withdrawn before the account owner turns 59 1/2 in most cases — contributions to a Roth IRA can be withdrawn anytime and for any reason, penalty- and tax-free. However, the earnings will be taxed and penalized if withdrawn before the age of 59 1/2 (with some exceptions).

Roth IRAs can be used as an emergency fund, but they are designed to be investment funds. There are other types of savings plans that make better emergency fund vehicles than a Roth IRA. These investment accounts can be used in a medical emergency and that includes the earnings with no penalties or taxes. So, if you have a Roth IRA and you need the money for medical reasons, it will be available to you. But if you need to fix your car, you should have other provisions for that type of emergency.

Roth IRAs have become popular in recent years because of the tax benefits that they provide. Many people make contributions in the early part of each year in order to be able to take these contributions as tax deductions. If you have not added a Roth IRA to you portfolio, it is something you should consider.