Never Use A Roth IRA As An Emergency Fund

Roth Withdrawal – Short Term Gain – Long Term Loss

Roth LossesRoth IRAs are unique retirement tools. They allow the owner of the account to withdraw their original deposits from the account at any time without penalty. Roth accounts are funded with after-tax money. Uncle Sam, therefore, doesn’t have to worry about getting a cut as money moves in and out of the IRA. This feature could lead some people to use their Roth IRA as a sort of emergency fund if they have no other savings to draw from.

According to The Simple Dollar, however, it is not a good idea to use the account in this way. Gains you’ve accumulated over time will be lost with a single withdrawal. ┬áSince there are lifetime limits on contributions, the impact can be great. Say that a 25 year-old deposited the $5,000 yearly limit and wanted to see how much this would turn into when they retire in 40 years. At 7 percent interest compounded annually, there will be $74,872 when they turn 65. Taking that $5,000 back out when they are 30 to cover an emergency will result in only $21,489 over the same time frame. Taking money out early might sound good in the short term, but it will be disastrous for long-term financial security.

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