How to Use Your Roth IRA as an Emergency Fund
There is an often-overlooked feature of the Roth IRA: emergency fund. Subject to income limits, you can contribute as much as $5,500 annually into a Roth IRA. If you're married, you and your spouse can each contribute $5,500, for a total of $11,000.
The reason that Roth IRA can be your emergency fund is because you can withdraw contributions anytime; it's only a Roth's investment earnings that must remain in your account until you're 59.5 if you want to avoid paying a 10% penalty. Roth IRAs offer this flexibility since you've already paid tax on your contributions, unlike traditional IRA contributions, on which you haven't paid taxes yet.
The advantage to putting emergency savings into a Roth IRA is that you don't miss the limited opportunity to make that year's retirement contribution. You can only contribute a few thousand dollars to a Roth IRA each year, and once a year passes without you contributing, you lose the opportunity to make that contribution forever. Since the Roth has a relatively low annual contribution limit, you don't want to miss out on making the full contribution for any year. The maximum you can contribute for the year, as of tax year 2016, is the lesser of $5,500, or your taxable compensation for the year. If you're 50 or older, you can contribute the lesser of $6,500 or your taxable compensation for the year.
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