Using your IRA as an emergency fund???

Does anyone thing using your IRA as your emergency fund is a wise, solid, long term investment idea???

http://www.tsptalk.com/mb/view_topic.php?id=435&forum_id=19&jump_to=4756

Any feedback is appreciate. I do not want to see a fellow board member get buried by the advice of another board member.

Thank you!

MT

[azanon]

Yes, because all contributions to Roth IRAs can be withdrawn at any time both penality and tax free, as I have stated on these boards on the past. The reason i gave when i made that statement is the same; Roth contribution money has already been taxed by the IRS upfront, so the IRS only has any "say"/claim on earnings from that point forward. I gave a source that will help your belief on this, but if you just stop and think for a moment, even common sense will reveal to you that this makes sense/ and is true. You already paid them! The IRS cant double dip on your contributions, via an additional tax or an unjustified penality!

Now granted, i would only recommend this if you weren't able to afford to fully fund your IRA's otherwise. If you can afford it, plus save on top of that, then by all means leave them alone and let them serve their primarily purpose; securing your future.

[Cinderella]

Did someone say "slipper"? Oh... "using an IRA as an emergency fund is a slipper slope".

In my humble opinion, I believe that a person should allocate their savings to include an emergency fund that is separate from their TSP and IRA. An emergency fund should consist of a minimum of 2 - 3 months of your salary. An IRA is a long-term investment for your retirement and not a short-term investment to be used when your car needs repaired or a major appliance needs replaced, etc.

That's my opinion in a "slipper".

[azanon]

I see that as mostly semantics, "slipper", depending on the situation. What do I mean? Lets say i can only afford to put in $1500/year for retirement into Roth, but i'm also interested in having an emergency savings (which is a good idea). To accomplish both, i might just go ahead and put the full 3K into the Roth, with $1500 of that arbitrarily "earmarked" as emergency savings. Why would I do that? Because i might not need the other $1500, and if i dont, then i'll have the luxury of added tax-free earnings on that additional $1500 for as long as i keep it in there. Furthermore, i wouldnt be able to put that $1500 into a Roth next year if i waited, unless i used up part of next year's 3K max (or whatever the max will be for next year, 4K?)

But as i said above, in the ideal situation, if you can afford to do both, by all means max your IRAs, and have a separate emergency fund.

[Rod]

MarketTimer wrote:
Does anyone thing using your IRA as your emergency fund is a wise, solid, long term investment idea???

http://www.tsptalk.com/mb/view_topic.php?id=435&forum_id=19&jump_to=4756

Any feedback is appreciate. I do not want to see a fellow board member get buried by the advice of another board member.

Thank you!

MT

As you all will see, MT isincorrect in his argument that original contributions to a ROTH are subject to the 10% penalty and taxes if one withdraws those at anytime before age 59 1/2.This simply is not true, for it is the EARNINGS that are subject to the penalty & taxes and NOT the original contributions. As long as you do not touch your earnings before age 59 1/2, you have nothing to worry about!

Go ahead, follow the link and find out for yourself.

I stillluv ya, MT!:^

Peace:D

[azanon]

A lot of this comes down to whether you like paying taxes or not. Call me odd, but I don't like paying them, and if i can get "free" tax-exempt growth on monies not even intended for retirement, i'm going to do it.

Think of the IRS as a bag of cow utters; start squeezing those puppies till the milk runs dry.

Cinderella wrote:
Did someone say "slipper"? Oh... "using an IRA as an emergency fund is a slipper slope".

In my humble opinion, I believe that a person should allocate their savings to include an emergency fund that is separate from their TSP and IRA. An emergency fund should consist of a minimum of 2 - 3 months of your salary. An IRA is a long-term investment for your retirement and not a short-term investment to be used when your car needs repaired or a major appliance needs replaced, etc.

That's my opinion in a "slipper".Cinderella............"slipper".............now I get it!! LOL Thank God it's Friday. :*

[Cinderella]

TGIF...... Amen

[Spaf]

MarketTimer wrote:
Does anyone thing using your IRA as your emergency fund is a wise, solid, long term investment idea???




Heck NO! When I retire, I will transfer my TSP to Vanguard for mutual funds which will make up a traditional IRA. This will have tax deferred monies, which would be ill used for an emergency fund. Instead/also I plan to have a seperate fund with Fidelity with mutual funds and my money market account that I can vary to my advantage with an ear marked $20K, say in a bond fund, specifically for an emergency.

Even with medical insurance, those deductables, can be like a rabbit in a cabbage patch! A hospital is one big rabbit cage. And doctors have a lot of rabbits they got to support, in them high$ houses, and high$ cars (plural). A friend of mine got a 2nd opinion, saying that surgery was not needed. The first doctors opinion was biased on having to pay bills.

[azanon]

Please folks, it was a bad/loaded question.

I think we can all agree the prudent person needs both, its just that if you cant afford to max your IRAs for retirement, then one is being aweful prudent to use a Roth to accomplish emergency savings as well while getting tax-exempt growth at the same time.

I'll admit this takes a higher order of thinking to do that, and if that makes things too complicated for someone, then by all means keep it separate, and, of course, be surenot toforget to pay uncle sam every april for his share of your "emergency savings".

So, if I'm understanding correctly, I good goal would be to save 15% of your pay for retirement. Put 10% in your TSP and put the other 5% in a Roth IRA? If you make $60000, then that would be the annual limit of your Roth IRA right now. Is this correct and does this sound like a good plan?

Gotta set goals................:^

[azanon]

So, if I'm understanding correctly, I good goal would be to save 15% of your pay for retirement. Put 10% in your TSP and put the other 5% in a Roth IRA? If you make $60000, then that would be the annual limit of your Roth IRA right now. Is this correct and does this sound like a good plan?

Gotta set goals................

If MT will allow me to drift off-topic here, i can give my 2 cents:

For a federal employee, i recommend saving 10% (not counting the match), but am open to as high as 15% (of gross household earnings). Choosing TSP vs Roth is a harder decision. I personally prefer maxing TSP first because of the low expense ratios of the funds, because i like the tax advantages now, and because you can get to all the money when you retire, which can be sooner than the 59 1/2 of Roth (for earnings and contributions) if you started work before 29 1/2.

The annual limit for your TSP is 14% of what you make (up to a maximum 13,000), Roths are currently 3K this year, and i believe go up to 3500 for next year. If you're married, your spouse can also have up to 3K this year. So you could save as much as 8400 for TSP, and 3000 for your Roth and 3000 for your spouse, if you're married.

Thanks az, may I call you az? I'm thinking this will pretty much be my goal especially since if you take your contributions out of your Roth, it won't be taxed "again". Was a concern I had about doing it in the first place.

Gotta love this site..................

[azanon]

Yeah Az is fine. :D

Yeah, its nice to be able to look at your Roths and think, you actually have that much money and don't owe anything extra to the IRS. In contrast with TSP, you have to estimate how much uncle sam will get (which will be a lot).

The flipside to Roths though is this; I just find it hard to trust the government at its word. With traditional type IRAs (TSP works the same), i know for sure i'll get my tax break i can deduct this year. With Roths, you have to trust the government to give you all that money in the end without any "wealth" tax that might be created sometime in the future. They "say" you wont be taxed anymore since you were taxed upfront, but I can recall many times the government changed their mind. Call me paranoid.

Its the bird in the hand vs two in the bush issue. I personally feel more comfortable with one in my hand, so therefore i max the TSP before moving to the Roth. Besides, my household income is relatively high atm so my tax bracket is pretty high (making the tax break attractive). Its possible that when i retire and i'm withdrawing, my tax bracket might be much lower, so my tax advantage then with the Roths could very well be lower than now.

[Cinderella]

azanon wrote:

Please folks, it was a bad/loaded question.

I think we can all agree the prudent person needs both, its just that if you cant afford to max your IRAs for retirement, then one is being aweful prudent to use a Roth to accomplish emergency savings as well while getting tax-exempt growth at the same time.

I'll admit this takes a higher order of thinking to do that, and if that makes things too complicated for someone, then by all means keep it separate, and, of course, be sure not to forget to pay uncle sam every april for his share of your "emergency savings".

Az, thank-you for sharing your opinion again....

My opinion may be unpopular, but I don't think it is a higher order of thinking to use your IRA for emergency funds. I will agree that everyone's situation is different, but in my opinion it is not sound long-term investing to use your IRA as if it were an ATM. If an investor makes a habit of borrowing from their long-term accounts, they are going to come up short at retirement.

Az, I am not trying to persuade you to think differently. Can we agree to disagree?

Rod - Earth to Rod,

If you meet one of the exemptions (you will not have to pay the 10% penalty and taxes): i.e. if you plan on crooking or becoming disabled prior to 59.5 then fund your IRA as your emergency fund.

Distributions, or Withdrawals
Any amount taken from your IRA account.

Distribution Defined
For a distribution to be qualified (to be penalty/tax free), it must occur at least five years after the Roth IRA owner established and funded his/her first Roth IRA,* and the distribution must occur under at least one of the following conditions:


The Roth IRA holder is at least age 59 ½ when the distribution occurs.

The distributed assets are used towards the purchase or rebuilding of a first home for the Roth IRA holder or a qualified family member. Qualified family members include the IRA owner's spouse, a child of the IRA owner and/or of the IRA owner's spouse, a grandchild of the IRA owner and/or of his/her spouse, a parent or other ancestor of the IRA owner and/or of his/her spouse. This is limited to $10,000 per lifetime.

The distribution occurs after the Roth IRA holder becomes disabled.

The assets are distributed to the beneficiary of the Roth IRA holder after the Roth IRA-holder's death.
You guys can make fun of me as much as you want but the problem here is your own comprehension level of a very important caveat of funding a IRA prior to having a emergency fund properly funded. You can not just take out money from your ROTH IRA prior to 59.5 without a penalty just because you want too you must meet one of the above, i.e. you also will have to pay your fed/state (if your state requires you too)income level on the amount taken out. YOU DO NOT GET THE 15% DEAL ON IRAS. Must pay your tax level.

MT

Rod - the ROTH IRA is lumped into one account how can you prove to the IRS if you are pulling out earnings or the original contributions??? The earnings would have to go to another account and be seperated.

Rod wrote:

MarketTimer wrote:
Does anyone thing using your IRA as your emergency fund is a wise, solid, long term investment idea???

http://www.tsptalk.com/mb/view_topic.php?id=435&forum_id=19&jump_to=4756

Any feedback is appreciate. I do not want to see a fellow board member get buried by the advice of another board member.

Thank you!

MT

As you all will see, MT isincorrect in his argument that original contributions to a ROTH are subject to the 10% penalty and taxes if one withdraws those at anytime before age 59 1/2.This simply is not true, for it is the EARNINGS that are subject to the penalty & taxes and NOT the original contributions. As long as you do not touch your earnings before age 59 1/2, you have nothing to worry about!

Go ahead, follow the link and find out for yourself.

I stillluv ya, MT!:^

Peace:D

[Rod]

MarketTimer wrote:
Rod - Earth to Rod,

If you meet one of the exemptions (you will not have to pay the 10% penalty and taxes): i.e. if you plan on crooking or becoming disabled prior to 59.5 then fund your IRA as your emergency fund.

Distributions, or Withdrawals
Any amount taken from your IRA account.

Distribution Defined
For a distribution to be qualified (to be penalty/tax free), it must occur at least five years after the Roth IRA owner established and funded his/her first Roth IRA,* and the distribution must occur under at least one of the following conditions:


The Roth IRA holder is at least age 59 ½ when the distribution occurs.

The distributed assets are used towards the purchase or rebuilding of a first home for the Roth IRA holder or a qualified family member. Qualified family members include the IRA owner's spouse, a child of the IRA owner and/or of the IRA owner's spouse, a grandchild of the IRA owner and/or of his/her spouse, a parent or other ancestor of the IRA owner and/or of his/her spouse. This is limited to $10,000 per lifetime.

The distribution occurs after the Roth IRA holder becomes disabled.

The assets are distributed to the beneficiary of the Roth IRA holder after the Roth IRA-holder's death. You guys can make fun of me as much as you want but the problem here is your own comprehension level of a very important caveat of funding a IRA prior to having a emergency fund properly funded. You can not just take out money from your ROTH IRA prior to 59.5 without a penalty just because you want too you must meet one of the above, i.e. you also will have to pay your fed/state (if your state requires you too)income level on the amount taken out. YOU DO NOT GET THE 15% DEAL ON IRAS. Must pay your tax level.

MT

Rod - the ROTH IRA is lumped into one account how can you prove to the IRS if you are pulling out earnings or the original contributions??? The earnings would have to go to another account and be seperated.

Rod wrote:

MarketTimer wrote:
Does anyone thing using your IRA as your emergency fund is a wise, solid, long term investment idea???

http://www.tsptalk.com/mb/view_topic.php?id=435&forum_id=19&jump_to=4756

Any feedback is appreciate. I do not want to see a fellow board member get buried by the advice of another board member.

Thank you!

MT

As you all will see, MT isincorrect in his argument that original contributions to a ROTH are subject to the 10% penalty and taxes if one withdraws those at anytime before age 59 1/2.This simply is not true, for it is the EARNINGS that are subject to the penalty & taxes and NOT the original contributions. As long as you do not touch your earnings before age 59 1/2, you have nothing to worry about!

Go ahead, follow the link and find out for yourself.

I stillluv ya, MT!:^

Peace:D





As I stated in the original thread, YOU ARE FAILING TO TAKE INTO CONSIDERATION NON-QUALIFIED DISTRIBUTIONS- THOSE UNDER 5 YEARS, ALONG WITH THE ORDERING RULES FOR THOSE DISTRIBUTIONS WHICH ALLOW YOU TO WITHDRAW YOUR ORIGINAL CONTRIBUTIONS BEFORE 5 YEARS BOTH PENALTY AND TAX FREE.

Thank you for playing, please come again!:zz

[Spaf]

Establishing an emergency savings account is vital in good times and in bad. The purpose of the fund is to sock away three to six months' living expenses. But this money could also be used when you're staring at major, unplanned expenses such as a car breakdown or a leaky roof.

In TSP, after retirementwe have the options of transfering our funds to a IRA or getting a Met Life annuity. The IRA would have mutual funds, liquid assets. The annuity is an insurance product. If your emergency funds got depleated, say for a major medical event or events, your IRA could be tapped. The annuity option, I don't think so.

[azanon]

Az, I am not trying to persuade you to think differently. Can we agree to disagree?

If you have both an adequate emergency fund and a retirement account, then I applaud you cause you're probably doing better than most. I was just trying to point out its possible to not have to pay taxes on your emergency fund money if you cant afford to fund your Roth retirement account fully otherwise. If you'd rather keep it separate for simplicity's sake under those circumstances, and just pay taxes, that's your choice.

Remember, you're the one that's in control. If you wanted to use that loophole in the Roths, of course i would suggest you keep track of what moneys are emergency and which are retirement. I certainly dont suggest you withdraw the money allocated for retirement too for emergencies. If one doesnt think they have the discipline to distinguish it, then sure dont expose yourself to the "pattern" of withdrawing from Roths.

If folks do what I do, they wouldnt "come up short" anyway. I fully fund my TSP before i even touch a roth. For most people, 30 years of 14% into the TSP + 5% match of TSP + pension + SS suppliment would be more than enough to maintain their lifestyle till they die.

[Rod]

BTW, for those interested, here's some definitive guidance from the IRS:

The first step would be to look at the rules for a qualified distribution. These rules say that if a distribution from a Roth IRA is qualified then it is not taxable. A qualified distribution is one that occurs at least five years after the individual established his/her first Roth IRA AND the distribution occurs because of one of the following four:


1) the distribution is made on or after the date on which the owner attains age 59 1/2,


2) made to a beneficiary or the estate of the owner on or after the date of the owner's death


3) is made after the owner is disabled as deigned in the Code , or


4) to use toward a first time home ( $10,000 limit)


The question then becomes, “ How is a nonqualified distribution taxed?”. This is addressed in the Final Roth IRA regulations (treasury Regulations), specifically Treas Reg § 1.408A-6, Q&A-4:


Q-4. How is a distribution from a Roth IRA taxed if it is not a qualified distribution?


A-4. A distribution that is not a qualified distribution, and is neither contributed to another Roth IRA in a qualified rollover contribution nor constitutes a corrective distribution, is includible in the owner's gross income to the extent that the amount of the distribution, when added to the amount of all prior distributions from the owner's Roth IRAs (whether or not they were qualified distributions) and reduced by the amount of those prior distributions previously includible in gross income, exceeds the owner's contributions to all his or her Roth IRAs. For purposes of this A-4, any amount distributed as a corrective distribution is treated as if it was never contributed.


Then , take a look at Treas Reg § 1.408A-6, Q&A-8, which states


Q-8. How is it determined whether an amount distributed from a Roth IRA is allocated to regular contributions, conversion contributions, or earnings?


A-8.


(a) Any amount distributed from an individual's Roth IRA is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category) —


(1) From regular contributions;
(2) From conversion contributions, on a first-in-first-out basis; and
(3) From earnings.
(b) To the extent a distribution is treated as made from a particular conversion contribution, it is treated as made first from the portion, if any, that was includible in gross income as a result of the conversion.

Once again,these are the ORDERING RULES I have been trying to emphasize time and time again. Itcan allbe summed up at:

http://www.investopedia.com/articles/retirement/03/030403.asp (http://www.investopedia.com/articles/retirement/03/030403.asp)

God Bless

[Pete1]

Azanon's logic is flawless, ie, if you cannot afford both an emergency account and a Roth, max the Roth. Ideally, you would have both but if you cannot, everything stated by Azanon holds true. Everybody reading this post should ignore MTs conclusions regarding withdrawing contributions because they are flat out wrong. He has been corrected numerous times by Rod, myself, and others and continues to scream inane advice to anybody foolish enough to listen.