Should You Use a Roth IRA as an Emergency Fund?

Posted by Jill on September 25, 2017
Pros and cons of using a Roth IRA as an emergency fund. Should you use your Roth IRA as an emergency fund?

Because of the flexibility of a Roth IRA, many people consider using their Roth as an emergency fund (or depositing their emergency fund into a Roth if you prefer to look at it that way).

Should you use a Roth IRA as an emergency fund?

Using a Roth IRA as an Emergency Fund

There are pros and cons to using your Roth IRA as an emergency fund. Using this strategy is certainly not for everyone. Read on to decide if it might work for you.

Roth IRA as Emergency Fund

Background on Roth IRAs

As we have discussed many times before, Roth IRAs basically rock. They’re the gold standard of retirement accounts.

You pay taxes on your money before contributing, put the money away for years, and NEVER pay taxes on withdrawals taken in retirement – so your gains are tax-free.

In addition, the money you put in is always yours to take back, tax- and penalty-free. With other accounts, your money is locked up until you turn 59 1/2 (with some exceptions). Withdrawals at that time are taxed as ordinary income, and if you want your money sooner, you’ll have to pay a 10% early distribution penalty as well.

In addition, Roth IRAs are not subject to required minimum distributions while you are living.

Could You Use Your Roth IRA as an Emergency Fund?

If you’re currently under-funding your retirement accounts, it’s probably because you have too many goals and can’t fund them all. You have to prioritize, and somehow retirement always gets pushed to the bottom – since, after all, it’s light-years away.

What’s more, everywhere you look someone is pushing you to beef up your emergency fund – and you just can’t do that AND fund retirement accounts.

Why your Roth SHOULD be your Emergency Fund…

  1. You can save for retirement now instead of later. If you wait to save for retirement until you have a fully-funded emergency fund  (6-9 or even 12 months of living expenses), you might be waiting for years. If you decide to let your Roth BE your emergency fund, you can start contributing right now. Since you can only contribute $5,500 per year, missing years can really have an effect on the total amount you have available at retirement.
  2. You can possibly enjoy higher gains – and they’re tax free. If you put $5,500 (the Roth IRA limit) into a savings account right now, it will earn you around 1% per year, and you’ll have to pay taxes on that amount. If you put it into a Roth and invest in some good index funds, you might see much higher gains, and they’ll be tax free.
  3. You might rethink your definition of “emergency.” Most people keep emergency funds in a savings account, or maybe CDs. It can be a little too easy to tap into those funds if, say, you’re a little over your vacation budget or forgot to factor your child’s birthday party expenses into this month’s budget. Keeping the funds in a harder-to-access Roth IRA might make you rethink spending that money.
  4. In a true emergency, you’ll tap it anyway. Regardless of how much we segment our money (on paper or in actual separate accounts), in a truly massive emergency, all funds are emergency funds. If you have a small Roth and a small emergency fund and your emergency fund runs out, you’ll likely take what you can out of the Roth anyway. You might as well benefit from putting it in the Roth now (for reasons 1 and 2 above).

…And why your Roth shouldn’t be your Emergency Fund

  1. You could be sacrificing your future. The biggest reason for not using your Roth as an emergency fund is because it’s a retirement account, made up of funds you should use when you actually retire and have no other source of income. If you take it out now, it’s not growing for later. And you can’t count on being able to put it back later since the maximum contribution is fairly small – once you take out the money, it’s likely out for good.
  2. It’s not guaranteed. If you’re putting money in a Roth, you’re probably investing at least some portion of it into the stock market. And if there’s anything we need to know, it’s that stock market gains are NOT guaranteed. If you put in $5,500 this year, it might be worth $6,000 next year…or it might be worth $4,000 or less. So while you are allowed to take out amounts up to the amount you contributed, there’s no guarantee that amount will actually still exist when or if you need it.
  3. It’s not liquid. If you have a true need-cash-now emergency, a Roth IRA won’t help you. It will take at least a few days to make the withdrawal and have the funds wired to your bank.


I think a Roth IRA should never be your primary emergency fund OR your primary retirement account. After all, you can only put in $5,500 per year (adjusted for inflation).

Even if you save the maximum every year, it’s probably not going to be enough to completely fund your retirement. Instead, you’ll likely rely on some combination of Social Security, a 401(k) or other employer-sponsored plan, and (if you’re lucky) an employer pension.

If your Roth represents a small portion of your overall retirement portfolio, it’s probably okay to let it double as your emergency fund – with one caveat. No matter what, I would always keep at least $1,000 in an easily-accessible (read: brick-and-mortar) bank account. You want to be able to hit the bank or ATM if you really need cash in a pinch.

Beyond that, I would try to contribute as much as possible to a Roth – while promising to only tap it for true, TRUE emergencies (like a major illness, job-loss or emergency room trip). You should still try to build up a dedicated emergency fund over time, but rest easy knowing that you’re not putting off retirement savings because of it.

What do you think – have you successfully used your Roth IRA as an emergency fund?

More Roth Topics

Wells Fargo Propel $200+ Sign Up Bonus

Posted by Madison on September 22, 2017

A reader just let me know about a new version of the Wells Fargo Propel card. This one is an American Express card with a 20,000 point sign up bonus. The old card was a Wells Fargo Propel World card. The 20,000 points for the Propel card should be worth $200 or more. It’s our […]

Continue reading…

New 4th Quarter 2017 5% Rotating Cash Rewards Credit Cards

Posted by Madison on September 21, 2017

4th quarter cash back is here! It’s time for 4th quarter cash back. 4th quarter cash back is all about holiday shopping! Organize, activate and put your credit cards into a regular rotation. Quarterly Cash Rewards It’s our quarterly check-in to reevaluate the cards we are carrying to take advantage of the best 4th quarter […]

Continue reading…

Your Guide to Free Credit Scores, Reports and Monitoring

Posted by Madison on September 19, 2017

After the recent Equifax data breach, it’s time to revisit monitoring your credit report! After all, at last count we do manage over 65 credit cards and over $1,000,000 in credit lines! Over time, we’ve covered how to get your free credit report, get your free credit scores and get free credit monitoring. Let’s review […]

Continue reading…

Barclaycard Arrival Plus $525+ Sign Up Bonus

Posted by Madison on September 15, 2017

The Barclaycard Arrival Plus card sign up bonus is currently 50,000 miles. You can redeem the miles for a $500 statement credit. You’ll get an extra bonus on the travel redemption, so it’s really a $525+ offer! The 50,000 mile sign up bonus is for a limited time; normally the sign up bonus is for […]

Continue reading…

How Much is the Penalty for No Health Insurance?

Posted by Madison on September 12, 2017

Obamacare, or the Affordable Care Act is now in the fourth year of providing health insurance. However, it will only be the third year of reconciling the health care requirements and the health insurance premium tax credit on your tax return in the spring. Health Insurance Penalty The fee, or insurance penalty tax, for going […]

Continue reading…

Wells Fargo Cash Wise Visa $200 Sign Up Bonus

Posted by Madison on September 8, 2017

Wells Fargo just increased the bonus on the Cash Wise Visa card to $200. It used to be a $150 sign up bonus earlier this year when it was on my list for our $4,292 Credit Card Application Spree. The card also earns 1.5% cash rewards. If you use mobile payments, you’ll earn 1.8% during […]

Continue reading…

Most Popular Finance Tips: August

Posted by Madison on September 5, 2017

Last month our most popular finance tips were finding your missing money, putting money in a 401k and an IRA at the same time, using credit cards strategically, college money myths, a $25 bonus for college students, handling stock market uncertainty, and a $100 PenFed bonus. If you missed the most popular finance tips last […]

Continue reading…

PenFed Power Cash Rewards $100 Credit Card Bonus

Posted by Madison on September 1, 2017

The PenFed Power Cash Rewards credit card bonus is $100. The card earns a flat 1.5% (or 2% with a checking account) on all purchases. If you aren’t familiar with Penfed, it’s a credit union but doesn’t require military service. In fact, long time readers will remember that we opened our mortgage with Penfed years […]

Continue reading…

Can You Have a 401k and an IRA at the Same Time?

Posted by Madison on August 31, 2017

A common misconception about IRAs – if you have a 401k at work, you can’t open an IRA. It’s false. You can contribute to an IRA and a 401k at the same time! Let’s take a closer look at investing in both an IRA and a 401k at the same time. Can You Have a […]

Continue reading…