Struggling to find extra cash for a Roth IRA contribution before the April 15 tax filing deadline? Consider scooting a little of your emergency cash reserve into your Roth IRA. Doing so may add to your retirement savings while the money remains available for emergencies. It’s like having your Roth IRA “cake” and eating it, too!
I recommend building an emergency reserve before adding to retirement or college savings. The general rule of thumb for an emergency fund is to have enough cash for three to six months’ worth of expenses. After that, why not put another three months of emergency cash to work in a Roth IRA? Here’s why this strategy might make sense for you:
- According to the IRS website, “You do not include in your gross income … distributions that are a return of your regular contributions from your Roth IRA(s).” So there are no taxes or penalties on a withdrawal of a Roth contribution — even before retirement age.
- A married couple can qualify for combined IRA contributions of up to $13,000 for 2014. This includes a $5,500 base contribution for each spouse plus $1,000 in catch-up contributions for those over age 50. Income and other limits apply, so make sure you consult your tax professional before taking any actions. (You have until April 15 to make contributions for 2014.)
- It’s important to keep emergency savings accessible, which also means safe. More aggressive investments might make sense after the value of the reserve exceeds the emergency reserve requirement.
You don’t want to use Roth IRA contributions like a checking account where money is removed frequently. This money really is intended to be for emergencies. Because of this, make sure to build three months of cash in savings outside the Roth IRA.
A single year’s contributions made to a Roth IRA might support the second half of the six-month reserve for a family income of $52,000. After two years, the reserve might support a family income of $104,000. It wouldn’t take long before the annual contributions could represent the second half of an emergency reserve for a family with income well above average.
Hopefully, your new habit of saving for an emergency using a Roth IRA might just become a sizable amount of savings for retirement.
Learn more about Matt on NerdWallet’s Ask an Advisor.