Oh man. I might be going to personal finance hell for this one, but ya gotta at least hear me out. You’ve all heard of the Roth IRA right? You know, it’s a crazy awesome type of Individual Retirement Account. Well, today I would like to introduce you to a new concept. The Roth IRE. That’s right. An Individual Retirement Emergency fund.
If you’ve heard of the Roth before, you probably know the annual contribution limit is $5,000. You probably also know that Roth contributions are made with ‘after-tax’ money. What you may not know is this tasty little morsel: Anyone can withdraw their Roth IRA contributions at any time, without penalty. No, you can’t withdraw earnings, but the contributions are free game.
So here is what I’m thinking. I currently have $10,000 in my E-fund. Currently, that’s about 6 months of expenses. Once I get hitched, however, that $10K only becomes like 3 to 4 months of expenses. This means I am faced with two goals that will soon conflict one another. My goal to have 6 months in an E-fund vs. my goal to fully fund my Roth every year. Unfortunately, I can’t do both at the same time. Either the E-fund savings takes precedent, or the Roth contributions become priority.
This is why I have decided to intertwine the two goals.
I’m yet to contribute a single dollar to my Roth this year, as I’ve been aggressively paying down my student loans and saving for things like my wedding. This hasn’t left me with a ton of flexibility in my cash flow. What I plan to do is save $5,000 as quickly as possible. I’ll contribute to my Roth IRA in three increments (a $2,000 contribution and two $1,500 contributions…I’ll explain why I don’t dollar cost average in a future post). Since I will be diverting all of my discretionary income to my Roth, my E-fund will remain stagnant.
The chances of me actually needing access to my E-fund are slim at best. I have a very stable job, am in pretty good health (knock on wood), and don’t have a ton of expenses. Since I’m 96.3% sure I wont be using my E-fund any time soon, I’d rather contribute to my Roth and maximize it’s earning potential.
If, by some freak chance, I end up unemployed I’ll first use my $10K savings. If I am still jobless after three or four months of hunting, I can always tap in to my Roth. Yes, I know, using a retirement account as an E-fund is a personal finance sin, but if there is no tax penalties it’s not so dumb. Besides, it will only take me a few months (after I’ve contributed to my Roth) to build up my E-fund to a true six months worth of expenses, so the window for me to be “up a creek without a paddle” is very small.
What do you think about the plan? Would you contribute to your Roth or E-fund first? Anyone else out there do what I’m doing and use the Roth as a “short term” E-fund option? Any financial know-it-alls see any flaws in my game plan?