The Roth IRA is a favorite place to stash savings and retirement funds. Pretty much every personal finance blogger talks about it. I have mine with Scottrade. It’s very simple to set up online, just go to www.scottrade.com. Now, I have no desire to reiterate here how it works along with the pros and cons, but here are some of the highlights:
- Contributions are made with after-tax money
- Earnings, capital gains, and dividends are tax free
- Withdrawals after age 59 1/2 are tax free
- Amount equal to the contributions can be withdrawn anytime without penalty
I’d like to focus on the last bullet here. It may sound contrary to conventional wisdom to highlight the fact that you can withdraw your contributions, but it’s an important point. Also, since you’ve already been taxed on the money, it only makes sense that you’d be able to take it out. It’s the investment gains that enjoy the tax deferment.
I’m not suggesting that your Roth IRA be used as an emergency fund. There is still a maximum contribution that can be made each year. If you take a withdrawal one year, you can’t make it up in a later year. This is important to keep in mind.
I would be very careful in deciding to take a withdrawal from your Roth, but there could be situations where it would not only make sense, but be very beneficial. I personally am considering using the advantages of the Roth IRA to save up for a down payment on a rental property.
The tax advantages of real estate are comparable to that of tax advantaged retirement accounts. I’ll talk more about the advantages of different investments later, but what I’m focusing on today is the flexibility of the Roth IRA.
Contribute what you can to the Roth IRA, and just keep your options in mind.
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by pfodyssey, on April 5 2007 @ 4:56 pm
If you’re willing to leverage the Roth for buying property, why not for an emergency fund as well? $100 in the Roth or $100 in an “emergency fund” is just the same. The only difference is that the Roth can grow the earning tax-free. Further, you may NEVER need to tap it for an emergency and you then get ALL the benefits of the Roth.
by limeade, on April 5 2007 @ 5:41 pm
I’m willing to leverage the Roth in order to buy property because that’s going from one investment to another.
I don’t view money in a Roth and money in an emergency fund the same. Tax free earnings is not the only difference. My emergency fund isn’t there for the earnings. I keep investments separate from normal finances like I talk about at the end of this post.