Double Standard

I have two investment vehicles established for retirement, My Roth IRA and my 401K. I don’t play favorites with these two accounts and if it was within my control, I would contribute to them equally (unfortunately the federal government puts a cap on Roth contributions). If you follow my net worth updates at all, you’ll notice both accounts perform pretty similarly. When my Roth goes up, so does my 401K. When my Roth goes down, my 401K follows suit (although to a lesser degree since the employer match helps mitigate my losses).

Don’t tell Girl Ninja, but I am madly, deeply, and passionately in love with my retirement accounts. If all goes according to plan, they will literally make me a millionaire. Ah yes, one day I’ll be sipping a non-alcoholic strawberry daiquiri on the beaches of the Washington coast with my beautiful wife (can’t travel too far otherwise we won’t stay millionaires very long).

Am I the only person kind of excited about being super old?

Even though I have equal affection for my two retirement accounts, if the you-know-what hits the fan, I’d definitely treat them differently. That my friends is called a double standard.

Girl Ninja and I have saved up some pretty serious cash over the last year and a half, so barring some major medical catastrophe, we shouldn’t have a need to dip in to our emergency fund. One day, however, we will have bought a home and Girl Ninja will likely be a full-time mom. In a few years, we probably won’t have the cash reserves we have now.

So what happens if an emergency comes along that exceeds what we have set aside (currently $10,000) for rainy days? I’ll tell you what. I’d raid my Roth IRA like a college student raids his parent’s fridge.

I like to think of my Roth as a quasi-savings account. You put money in to it (with after tax dollars) and can take those contributions out at any time without penalty. That perk alone makes it the freakin’ Swiss Army knife of the financial sector. It combines a savings account, retirement account, and emergency fund in to one sexy product. Tell me that doesn’t get you all hot-and-bothered?!!? If I pulled my from my 401K, however, we’d be faced with tax obligations AND a ten percent early withdrawal penalty. Definitely not sexy.

Have you ever thought about treating a Roth IRA like a quasi-savings account? If needed, would you pull from a Roth or 401k first? Anyone else want to make sweet, sweet financial love to their Roth IRA?

p.s. don’t pull from your retirement accounts for things like new cars, kitchen renovations, or buying a house. The point of saving for retirement is saving for retirement, not buying shiny things that give you artificial happiness.

15 thoughts on “Double Standard

  1. The Roth account sounds like Canada’s version of our Tax Free Savings Account (ignore the name, you can use it to purchase any financial product you’d like, the name just makes it sound like a savings account). We can only put up to $5K a year in a TFSA and our lifetime contribution room starts from when they introduced it three years ago (so at this point anyone can have contributed up to $15K). Does the US Roth account have any restrictions?

    • Plenty. Can you imagine any provision in the US tax code to be simple? There are rules regarding earned income, contributions, rollovers, conversions, earnings on the principal, a five-year holding period in some cases, penalties, you name it. I’ll let you Google it if you really want to know.

  2. Only on the earnings, Drew. Contribution withdrawals are tax and penalty-free.

    My Roth IRA is literally a savings account/emergency fund, not just quasi. ING Direct Roth IRA FDIC Savings.

    If you can’t build an emergency fund and contribute to a Roth IRA, do both!

    • Donnie and Ninja are both correct. Direct contributions to a Roth are always yours to do with as you wish. Rollover or converted contributions have a 5-year holding period restriction.

      However: “don’t pull from your retirement accounts for things like new cars, kitchen renovations, or buying a house.” Actually for buying a house, you can take up to $10K penalty-free from a Roth. (The rules of course are complicated, so Google them if you want to know the details.)

      I agree that it’s valid to consider a Roth as a savings/emergency account. Yet it would be the last account I draw upon, even in retirement, because once you hit 59 1/2, all contributions and earnings continue to grow tax-free.

      • I know you can take the money tax free, but I was trying to make the point that your Roth shouldn’t be considered a “house savings fund” just because you wont get penalized for tapping it. It’s a retirement account, with the ability to operate as a savings/emergency fund if needed.

  3. I’ve had to pull from my RothIRA when shit hit the fan. And dude, I had the check in my mail box the next day. It was honestly more liquid that my high interest online savings account, which takes minimum three days to transfer. Luckily for me, I was able to pull my shit together and reinvest when I had withdrawn within the 90 day window, so I didn’t have to pay the front-load fees to reinvest my cash. w00t.

    So yes, I totally consider my Roth IRA to be a quasi-emergency fund. I’ve used it before and I would do it again.

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