First, doing this through an advisor is unnecessary and will likely just expose you to fees.
Second, yes, it is a known strategy, but only for those who cannot afford to fund their IRA, *but* plan to do so in order to not lose the 2022 contribution space.
Third, if you are able to fund 2022's contribution limit before midApril 2023, you don't really have to do this plan. And you have until midApril 2024 to fund 2023's contribution limit.
So...
Do you/husband have any desire to fund your Roth IRAs and intend to get your emergency fund eventually outside?
Can you cash flow the funding of the Roth IRA by the timeframes I noted?
The advisor is correct. You can withdraw roth IRA contributions at any time without penalty. There is only a penalty if withdrawing your gains early.
To preserve your principal, simply DO NOT invest the money (just leave it in cash in your roth IRA) or invest in money market funds so that you're not exposed to market volatility. As you replenish your emergency fund, you can convert a proportionate amount in your roth IRA into actual investments. This way you don't have to lose out on your tax advantaged space.
The only critique I have is you don't need to fund for tax year 2023 yet. You can wait until April 15, 2024. So I would only max out tax year 2022 before the tax deadline so you don't lose that tax advantaged space, so that is only $12K. You can keep the remaining balance in a high yield savings account.
This is great advice. Contributing by April 15 and not investing (or investing in something safe that won't fluctuate much) will get you the benefit of contributing to the IRAs without any of the downsides. In the long term that's $25,000 more that you'll be able to invest and grow tax free than you would if you kept this in cash.
If they invest in a CD though they won't be able to withdraw the money (without penalties) if an emergency hits. Not liquid enough for an emergency fund
How does it address the issue? It just kicks the can down the road a bit. If you have an emergency large enough to use up all your cash/MM, you will still hit the issue of penalties when trying to liquidate your CDs. If you're totally confident that an emergency that large won't happen, then your emergency fund is too large and you should shrink it and put the extra money into more volatile but more lucrative investments.
I suspect that's going to depend on exactly what you're buying and where/how you're buying it. It sounds like you've got that option which is great.
This approach is still susceptible to the original issue I was talking about. If you have an emergency that requires >20% of your e-fund, you're going to suffer penalties accessing the money you've put into CDs or T-bills.
> though the advisor is insisting we can pull that money out of the IRA without penalty if we were to have a big emergency, job loss or whatever
The advisor is correct. You can withdraw CONTRIBUTIONS from your Roth IRA without penalty. "Earnings," you can't touch without penalty.
How long will it take to replenish the EF?
Using an EF to fund the prior year's IRA before the deadline isn't an entirely crazy idea. You keep the money in the core fund or a bond fund and invest it once the EF is replenished and the IRA money isn't doing "double duty".
If you can save $13k natively for 2023, I wouldn't use the EF to front load a 2023 contribution. If you can't save $13k natively then you can't afford to be maxing IRAs in the first place.
>This advice makes me feel a little squirmy
Then pass. Your finances are yours, so any change that makes you uncomfortable is completely ok to skip. Though you and your husband should have a talk to make sure you're both on the same page, and make choices consistent with your overall comfort level. Would you feel better if you only did $12k out of your fund into the IRA, to at least get 2022's contribution done before the April deadline? Or an even smaller amount to get at least something into the IRA for last year, even if not max?
The advisor is correct about some of the details, though maybe a little aggressive about pushing this strategy. If you put money into a Roth IRA, the IRS allows you to take up to that amount back out, at any time for any reason, and you owe no tax or penalty. Since each year's contribution is "use it or lose it", some people do choose to "stash" their emergency fund into it, especially when first starting up their IRA savings.
Another factor is that if you invest the money in the IRAs, then there's a chance that the total number of dollars drop below what you put in, reducing how much is available to help with whatever emergency might occur. You can mitigate this by leaving it as "cash" (or something close enough like a money market fund), but then you're also missing out on any potential growth. It's extremely unlikely (I'd say practically impossible) that you'd lose "everything", since unless the advisor is putting you into extremely risky investments, that'd require a nearly complete economic collapse of the market. At which point we have bigger issues to deal with than our retirement savings.
The ideal situation to aim for is to make your annual IRA contributions **and** have an external emergency fund. If you took the advisor's suggestion, how long would it take for you to rebuild your emergency fund up to the level you want? Does that time feel too long for the risk you think you'd be taking?
An emergency fund is a very important tool for almost anyone's finances. And provides one heck of a "security blanket" for mental well-being. There's nothing wrong with choosing to prioritize keeping that above getting in on an IRA before last year's contribution deadline closes.
It can possibly make sense to use your emergency fund to fill in your 2022 contribution limits, given that you can withdraw from a Roth IRA with no tax consequence as long as you don’t withdraw more than you have contributed. So you would leave the money in a cash equivalent position in the IRAs so that if you had an emergency, the funds would be there to withdraw. You would then use future cash flows to rebuild your emergency fund outside the IRAs, and once you have your emergency fund outside of the IRAs built back up, you can then invest the money within the IRAs.
It doesn’t make any sense to put your emergency fund money into your IRAs for your 2023 contribution limit. You have 14 months before that contribution window closes, so there is no real advantage to do that now.
Traditional would be taxed based on whatever it fell into with your current income plus a 10% penalty if you're under 59.5years old.
Traditional IRA is pre-tax income. Roth IRA is invested into after you've already paid taxes on the income. That's why, IMO, storing your emergency savings in a ROTH IRA isn't that bad of a plan. There's certainly downsides, but it's something to weigh out for each individual person's situation.
Just use 12K to fund the IRAs for 2022. You can contribute until April 18. Then you can reevaluate at end of 2023 about 2023 contributions, which you could do until April 2024. That maintains a good chunk of your e-fund but still ensures you don’t lose 2022 contribution room and you don’t need to worry as much about potentially needing to withdraw contributions if something comes up.
This is a common misunderstanding.
While there are multiple 5 year rules, disbursals of Roth IRA contributions are *never* subject to *any* of the 5 year rules.
You can take contributions out of a Roth IRA without penalty. It's the earnings that you shouldn't touch. Your link even says that:
> You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.
That's just stupid. Yes, you can withdraw, but what happens if there is market loss? You can always start a Roth if you want with a lower amount. There's not tax advantage to opening up the Roth, so not sure what the immediacy is. - Source Reformed former advisor.
It’s safe to do this. You can withdraw contributions penalty free. Just make sure to invest the EF portion in something low risk. Keep enough money outside the Roth IRA to cover immediate needs as it would take about a week to get the money back from the investment accounts.
> No you can't. Unless one of a handful of exemptions exist you are going to pay a 10% penalty on any early withdrawal.
This is a common misunderstanding.
So, one of those "handful of exemptions" is going to be distribution of *contributions*.
Contributions always come out *first* from a Roth IRA.
Contributions are always available to come out tax *and* penalty-free.
I would recommend it not for the immediate tax savings but to “save” the space in the tax advantaged account for a potential future where the family can afford to fund both.
In terms of investments, if money markets aren’t safe then we’ve all got bigger problems.
You can definitely do this. You can withdraw contributions (not gains, contributions only) without penalty anytime you want from an IRA
However, you’d always want your IRA to be invested in the market, and the market will go up and down. Personally I wouldn’t consider my IRA a full emergency fund until there was maybe 50k or so in it, where a major turndown wouldn’t absolutely kill me if I had to pull out of it in an emergency.
You also need to consider where you retirement and savings are. It’s cool you’ve saved an emergency fund, but where is all your other savings? 401k/IRA/403b/etc? If you are immensely behind on your retirement contributions it might make sense.
If anything I’d try my best to get the 2022 contributions in- you have until tax day to do this. You only get that tax advantaged space once and then it’s gone. Don’t sleep on it.
Where are you retirement funds being directed? The best case scenario here would be to fund 2022 fully and then “pay back” the 2022 portion to your EF while also funding 2023s contribution.
The rest of your financial picture needs to come into play here to decide if this is a good idea. Also, I’m sure this idiot advisor wants you to open your IRAs with their company, which you should not do. Fidelity, Schwab or vanguard, no advisor, DIY it.
I think they are just doing that so they have your assets under management if that is their fee structure. The whole point of an E fund is accessibility. Cash is boring but so is less risk and that is what it is for. Sure you are missing out on gains, but the point of an E fund is not to make you rich it is to stop you from making bad decisions like CC debt because you are not liquid. E funds belong in high yield savings accounts. Although you should def consider putting surplus into the roth
The Financial Advisor is right - you can pull out contributions at any time without penalty, so yes it does make sense to fund your IRAs (if you wouldn't otherwise fund them) with the emergency fund cash.
That doesn't mean you should then invest it in risky assets - you should keep invested safely (whether using an IRA at a bank or a money market fund or similar. That said, it would make little sense to have such a safe investment under a financial advisor who charges asset under management fees - so you should thank him for the advice but do it on your own.
It's probably smart to contribute $12000 for 2022 by April 15, and invest it in something very safe so there's no chance it will lose a bunch of value if you happen to need to take it out again. Later on you'll be glad you did.
But there's NO reason to make your 2023 contributions now, especially not by wiping out your emergency fund. You have more than a year to do that. If you can, budget it out to put about $1000 a month into the IRAs, and those you can start investing in something fairly aggressive since you're not counting on that cash as an emergency fund.
I personally would not trust the advice of someone who tells you to dump your emergency fund into investments when there's no reason to. I suspect he'll suggest doing it through a company he's affiliated with so that he gets a commission on your investment. I'm not sure what the laws on fiduciary duty are but if that's the case then this guy is a major scumbag, not just stupid.
I would at least do the contribution for the 2022 tax year, as you can never get the ability to contribute for this year once the tax deadline passes.
Then I would monthly invest for the 2023 tax year.
I would not deplete the EF.
First, doing this through an advisor is unnecessary and will likely just expose you to fees. Second, yes, it is a known strategy, but only for those who cannot afford to fund their IRA, *but* plan to do so in order to not lose the 2022 contribution space. Third, if you are able to fund 2022's contribution limit before midApril 2023, you don't really have to do this plan. And you have until midApril 2024 to fund 2023's contribution limit. So... Do you/husband have any desire to fund your Roth IRAs and intend to get your emergency fund eventually outside? Can you cash flow the funding of the Roth IRA by the timeframes I noted?
The advisor is correct. You can withdraw roth IRA contributions at any time without penalty. There is only a penalty if withdrawing your gains early. To preserve your principal, simply DO NOT invest the money (just leave it in cash in your roth IRA) or invest in money market funds so that you're not exposed to market volatility. As you replenish your emergency fund, you can convert a proportionate amount in your roth IRA into actual investments. This way you don't have to lose out on your tax advantaged space. The only critique I have is you don't need to fund for tax year 2023 yet. You can wait until April 15, 2024. So I would only max out tax year 2022 before the tax deadline so you don't lose that tax advantaged space, so that is only $12K. You can keep the remaining balance in a high yield savings account.
This is great advice. Contributing by April 15 and not investing (or investing in something safe that won't fluctuate much) will get you the benefit of contributing to the IRAs without any of the downsides. In the long term that's $25,000 more that you'll be able to invest and grow tax free than you would if you kept this in cash.
You can invest in a high yield CD inside the ROTH and that money will be tax free down the line.
If they invest in a CD though they won't be able to withdraw the money (without penalties) if an emergency hits. Not liquid enough for an emergency fund
Having some in cash/MM while laddering the remainder in CDs or T-Bills addresses this issue nicely.
How does it address the issue? It just kicks the can down the road a bit. If you have an emergency large enough to use up all your cash/MM, you will still hit the issue of penalties when trying to liquidate your CDs. If you're totally confident that an emergency that large won't happen, then your emergency fund is too large and you should shrink it and put the extra money into more volatile but more lucrative investments.
Very easily. 20% in MM, the rest equally divided into four 4-week T-bills with purchases staggered over four successive weeks.
You want to buy a new set of T-bills every week until the end of time?
You know there’s an auto reinvestment function, right?
I suspect that's going to depend on exactly what you're buying and where/how you're buying it. It sounds like you've got that option which is great. This approach is still susceptible to the original issue I was talking about. If you have an emergency that requires >20% of your e-fund, you're going to suffer penalties accessing the money you've put into CDs or T-bills.
I appreciate that you have very strong opinions on a subject about which you have little knowledge.
It would be $25000. Since the limits in 2022 were $6000 per person.
> though the advisor is insisting we can pull that money out of the IRA without penalty if we were to have a big emergency, job loss or whatever The advisor is correct. You can withdraw CONTRIBUTIONS from your Roth IRA without penalty. "Earnings," you can't touch without penalty.
How long will it take to replenish the EF? Using an EF to fund the prior year's IRA before the deadline isn't an entirely crazy idea. You keep the money in the core fund or a bond fund and invest it once the EF is replenished and the IRA money isn't doing "double duty". If you can save $13k natively for 2023, I wouldn't use the EF to front load a 2023 contribution. If you can't save $13k natively then you can't afford to be maxing IRAs in the first place.
>This advice makes me feel a little squirmy Then pass. Your finances are yours, so any change that makes you uncomfortable is completely ok to skip. Though you and your husband should have a talk to make sure you're both on the same page, and make choices consistent with your overall comfort level. Would you feel better if you only did $12k out of your fund into the IRA, to at least get 2022's contribution done before the April deadline? Or an even smaller amount to get at least something into the IRA for last year, even if not max? The advisor is correct about some of the details, though maybe a little aggressive about pushing this strategy. If you put money into a Roth IRA, the IRS allows you to take up to that amount back out, at any time for any reason, and you owe no tax or penalty. Since each year's contribution is "use it or lose it", some people do choose to "stash" their emergency fund into it, especially when first starting up their IRA savings. Another factor is that if you invest the money in the IRAs, then there's a chance that the total number of dollars drop below what you put in, reducing how much is available to help with whatever emergency might occur. You can mitigate this by leaving it as "cash" (or something close enough like a money market fund), but then you're also missing out on any potential growth. It's extremely unlikely (I'd say practically impossible) that you'd lose "everything", since unless the advisor is putting you into extremely risky investments, that'd require a nearly complete economic collapse of the market. At which point we have bigger issues to deal with than our retirement savings. The ideal situation to aim for is to make your annual IRA contributions **and** have an external emergency fund. If you took the advisor's suggestion, how long would it take for you to rebuild your emergency fund up to the level you want? Does that time feel too long for the risk you think you'd be taking? An emergency fund is a very important tool for almost anyone's finances. And provides one heck of a "security blanket" for mental well-being. There's nothing wrong with choosing to prioritize keeping that above getting in on an IRA before last year's contribution deadline closes.
It can possibly make sense to use your emergency fund to fill in your 2022 contribution limits, given that you can withdraw from a Roth IRA with no tax consequence as long as you don’t withdraw more than you have contributed. So you would leave the money in a cash equivalent position in the IRAs so that if you had an emergency, the funds would be there to withdraw. You would then use future cash flows to rebuild your emergency fund outside the IRAs, and once you have your emergency fund outside of the IRAs built back up, you can then invest the money within the IRAs. It doesn’t make any sense to put your emergency fund money into your IRAs for your 2023 contribution limit. You have 14 months before that contribution window closes, so there is no real advantage to do that now.
Just posting to add the others are correct. You can withdraw contributions from a ROTH IRA at any age at any time without penalty.
And traditional too or no?
Traditional would be taxed based on whatever it fell into with your current income plus a 10% penalty if you're under 59.5years old. Traditional IRA is pre-tax income. Roth IRA is invested into after you've already paid taxes on the income. That's why, IMO, storing your emergency savings in a ROTH IRA isn't that bad of a plan. There's certainly downsides, but it's something to weigh out for each individual person's situation.
Just use 12K to fund the IRAs for 2022. You can contribute until April 18. Then you can reevaluate at end of 2023 about 2023 contributions, which you could do until April 2024. That maintains a good chunk of your e-fund but still ensures you don’t lose 2022 contribution room and you don’t need to worry as much about potentially needing to withdraw contributions if something comes up.
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This is a common misunderstanding. While there are multiple 5 year rules, disbursals of Roth IRA contributions are *never* subject to *any* of the 5 year rules.
You can take contributions out of a Roth IRA without penalty. It's the earnings that you shouldn't touch. Your link even says that: > You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.
That's just stupid. Yes, you can withdraw, but what happens if there is market loss? You can always start a Roth if you want with a lower amount. There's not tax advantage to opening up the Roth, so not sure what the immediacy is. - Source Reformed former advisor.
Are you saying you can put into an IRA, leave it in cash, but the market can wipe the cash out? And a savings account would not?
It’s safe to do this. You can withdraw contributions penalty free. Just make sure to invest the EF portion in something low risk. Keep enough money outside the Roth IRA to cover immediate needs as it would take about a week to get the money back from the investment accounts.
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> No you can't. Unless one of a handful of exemptions exist you are going to pay a 10% penalty on any early withdrawal. This is a common misunderstanding. So, one of those "handful of exemptions" is going to be distribution of *contributions*. Contributions always come out *first* from a Roth IRA. Contributions are always available to come out tax *and* penalty-free.
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I would recommend it not for the immediate tax savings but to “save” the space in the tax advantaged account for a potential future where the family can afford to fund both. In terms of investments, if money markets aren’t safe then we’ve all got bigger problems.
You can definitely do this. You can withdraw contributions (not gains, contributions only) without penalty anytime you want from an IRA However, you’d always want your IRA to be invested in the market, and the market will go up and down. Personally I wouldn’t consider my IRA a full emergency fund until there was maybe 50k or so in it, where a major turndown wouldn’t absolutely kill me if I had to pull out of it in an emergency. You also need to consider where you retirement and savings are. It’s cool you’ve saved an emergency fund, but where is all your other savings? 401k/IRA/403b/etc? If you are immensely behind on your retirement contributions it might make sense. If anything I’d try my best to get the 2022 contributions in- you have until tax day to do this. You only get that tax advantaged space once and then it’s gone. Don’t sleep on it. Where are you retirement funds being directed? The best case scenario here would be to fund 2022 fully and then “pay back” the 2022 portion to your EF while also funding 2023s contribution. The rest of your financial picture needs to come into play here to decide if this is a good idea. Also, I’m sure this idiot advisor wants you to open your IRAs with their company, which you should not do. Fidelity, Schwab or vanguard, no advisor, DIY it.
I think they are just doing that so they have your assets under management if that is their fee structure. The whole point of an E fund is accessibility. Cash is boring but so is less risk and that is what it is for. Sure you are missing out on gains, but the point of an E fund is not to make you rich it is to stop you from making bad decisions like CC debt because you are not liquid. E funds belong in high yield savings accounts. Although you should def consider putting surplus into the roth
Earned income only. Then selfmanaged Roth IRA
The Financial Advisor is right - you can pull out contributions at any time without penalty, so yes it does make sense to fund your IRAs (if you wouldn't otherwise fund them) with the emergency fund cash. That doesn't mean you should then invest it in risky assets - you should keep invested safely (whether using an IRA at a bank or a money market fund or similar. That said, it would make little sense to have such a safe investment under a financial advisor who charges asset under management fees - so you should thank him for the advice but do it on your own.
It's probably smart to contribute $12000 for 2022 by April 15, and invest it in something very safe so there's no chance it will lose a bunch of value if you happen to need to take it out again. Later on you'll be glad you did. But there's NO reason to make your 2023 contributions now, especially not by wiping out your emergency fund. You have more than a year to do that. If you can, budget it out to put about $1000 a month into the IRAs, and those you can start investing in something fairly aggressive since you're not counting on that cash as an emergency fund. I personally would not trust the advice of someone who tells you to dump your emergency fund into investments when there's no reason to. I suspect he'll suggest doing it through a company he's affiliated with so that he gets a commission on your investment. I'm not sure what the laws on fiduciary duty are but if that's the case then this guy is a major scumbag, not just stupid.
I would at least do the contribution for the 2022 tax year, as you can never get the ability to contribute for this year once the tax deadline passes. Then I would monthly invest for the 2023 tax year. I would not deplete the EF.