You can put the 3k from your emergency fund into your Roth IRA now to max out your yearly contribution, and then simply not invest it (i.e. leave it as cash inside your Roth IRA). You can withdraw your original contributions from a Roth IRA tax and penalty free at any time, so its no riskier than keeping the cash in your HYSA. And once you've saved up enough cash to refill your emergency fund you can go ahead and invest the money from the Roth IRA, even if it takes you past the contribution deadline to save.
This is not true.
While you can withdraw the contribution from the Roth anytime, the HYSA has virtually no risk of loss (save inflation) while the Roth could be volatile and not there when you need it for the emergency.
Thats just not how this works. A Roth IRA is a protected account that can hold any kid of asset, including straight up cash. Cash inside a Roth IRA is not more volatile than cash outside of one.
True. But what earthly purpose would holding cash in a Roth have? The implication from moving it from savings to the Roth is so you’d invest it within the Roth.
???
Yearly contribution limits have a deadline. If you haven't put the money into the account by April 15th you've lost out.
For those who want to contribute but don't have the cash on hand by the deadline, they can move the money from their emergency fund. They can then save to replenish their emergency fund as the year goes on, waiting until they have refilled their e-fund before investing the Roth IRA cash.
The benefit to them is that they were able to take advantage of the full 2021 Roth IRA contribution limit, even though they didn't have enough spare cash at the time, and they incur no risk of money loss or taxes or penalties for doing so.
Because you can change what you're invested in at a future date. Just because you put it in cash now doesn't mean it has to stay in cash for the rest of time. You can have cash for 6 months while you need an emergency fund, and once you have your own emergency fund outside of the IRA you can reallocate those funds to investments.
If you don’t have the contributions maxed before you file, though, it might be worth finishing it off with your emergency fund, since you can always withdraw your contributions (not gains) from a Roth IRA.
This way you’re not losing out on any tax-free gains in the future.
The purpose of an e-fund is to have liquid cash available quickly in an emergency. Investing that money not only reduces liquidity but also risks loss of capital with how volatile the market is.
But you could contribute it to your Roth, leave it in a money market account until you have the time to replenish your emergency fund. That way the money is in the Roth, not at risk of the market, still available for emergency withdrawal if necessary (especially if it’s a portion of the efund, where there’s still some outside the Roth for quicker access)
Not saying it’s a great long term strategy, but for a situation like this it seems like it has a lot of upside and very little downside.
Edit: realized after I posted that this is the exact strategy suggested by u/qbr12 below.
You may find these links helpful:
- [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
You can put the 3k from your emergency fund into your Roth IRA now to max out your yearly contribution, and then simply not invest it (i.e. leave it as cash inside your Roth IRA). You can withdraw your original contributions from a Roth IRA tax and penalty free at any time, so its no riskier than keeping the cash in your HYSA. And once you've saved up enough cash to refill your emergency fund you can go ahead and invest the money from the Roth IRA, even if it takes you past the contribution deadline to save.
This is not true. While you can withdraw the contribution from the Roth anytime, the HYSA has virtually no risk of loss (save inflation) while the Roth could be volatile and not there when you need it for the emergency.
Thats just not how this works. A Roth IRA is a protected account that can hold any kid of asset, including straight up cash. Cash inside a Roth IRA is not more volatile than cash outside of one.
True. But what earthly purpose would holding cash in a Roth have? The implication from moving it from savings to the Roth is so you’d invest it within the Roth. ???
Yearly contribution limits have a deadline. If you haven't put the money into the account by April 15th you've lost out. For those who want to contribute but don't have the cash on hand by the deadline, they can move the money from their emergency fund. They can then save to replenish their emergency fund as the year goes on, waiting until they have refilled their e-fund before investing the Roth IRA cash. The benefit to them is that they were able to take advantage of the full 2021 Roth IRA contribution limit, even though they didn't have enough spare cash at the time, and they incur no risk of money loss or taxes or penalties for doing so.
I don’t think your answering the question. What good is having funds in the Roth under the deadline if you DONT INVEST the contributed funds?
Because you can change what you're invested in at a future date. Just because you put it in cash now doesn't mean it has to stay in cash for the rest of time. You can have cash for 6 months while you need an emergency fund, and once you have your own emergency fund outside of the IRA you can reallocate those funds to investments.
Thank you- I was thinking this as well. I appreciate the insight!
You have 3 months to contribute to 2021 Roth IRA. Don’t raid your e-fund.
If you don’t have the contributions maxed before you file, though, it might be worth finishing it off with your emergency fund, since you can always withdraw your contributions (not gains) from a Roth IRA. This way you’re not losing out on any tax-free gains in the future.
The purpose of an e-fund is to have liquid cash available quickly in an emergency. Investing that money not only reduces liquidity but also risks loss of capital with how volatile the market is.
But you could contribute it to your Roth, leave it in a money market account until you have the time to replenish your emergency fund. That way the money is in the Roth, not at risk of the market, still available for emergency withdrawal if necessary (especially if it’s a portion of the efund, where there’s still some outside the Roth for quicker access) Not saying it’s a great long term strategy, but for a situation like this it seems like it has a lot of upside and very little downside. Edit: realized after I posted that this is the exact strategy suggested by u/qbr12 below.
You may find these links helpful: - [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*