View all posts

How to Use Your Roth IRA as an Emergency Fund*


How to Use Your Roth IRA as an Emergency Fund*

The future is uncertain, so it’s wise to prepare financially for unpredictable circumstances. However, it may not be feasible for everybody to maintain a separate savings account for emergency funds. With branches across eastern Massachusetts, St. Mary’s Credit Union understands this, which is why we’re informing our community about their options. Here, we’ve broken down the use of a Roth IRA account for emergencies and the Roth IRA limits to know when doing so*.

Why Choose a Roth IRA*?

While it’s always best to have a separate account for emergencies, a Roth IRA is a good option if you can’t afford to set up separate retirement and emergency accounts. Unlike a traditional IRA retirement account, a Roth IRA is funded with after-tax dollars, meaning that you pay tax on your contributions before they go into the account – not after withdrawal. And because the tax on your Roth IRA funds has already been paid, you can withdraw those funds without losing money on taxes and penalties. 

A Roth IRA is also very accessible. Other kinds of retirement accounts will lock your money away until retirement, but contributions previously deposited to a Roth IRA can be used at any time without penalty*.    

Starting an Emergency Account

If you’re planning on starting a Roth IRA for emergency use, it helps to plan ahead and set up the account with that goal in mind*. Here are a few steps to consider when setting up a Roth IRA:

  • Focus on emergencies. While a Roth IRA can be multi-purpose, we recommend deciding whether it’ll be primarily an emergency fund or a retirement fund*.
  • Stick to safe investments*. If you’re creating an emergency fund, reliable funds are more important than long-term growth*. You don’t want to risk your stocks falling and therefore your monies decreasing when you need it most*.
  • Keep accurate records. Keep track of how much you put into your account every year so you know how much you can safely withdraw.

Withdrawing Emergency Funds

There are a few things you need to consider when withdrawing your emergency funds from a Roth IRA account. First, don’t expect immediate cash. Withdrawing money from a Roth IRA is different than a regular savings account withdrawal, and it can take at least a few days to have that money on hand.

Second, avoid withdrawing from your earnings (interest that you earned) at all costs. This is because any money your account has earned from interest or dividends is new earnings, and it hasn’t been taxed yet*. If you withdraw more than you deposit, you’ll have to pay both tax and a 10% penalty*.

Finally, you can only contribute a limited amount of funds to your Roth IRA per year, and once you withdraw money, it can’t be replaced*. Therefore, it’s wise to only use your Roth IRA for major emergencies, such as job loss and medical expenses*. Tapping into a Roth IRA for minor expenses means the account will have less to use during major emergencies or won’t reach its true interest-earning potential*.

Start a Roth IRA Now

If you have a Roth IRA account already, it can be a valuable resource in case of emergencies*. If not, the best time to start preparing for the future is now. St. Mary’s Credit Union offers both traditional and Roth IRAs for retirement savings and emergencies. We can also help you set up a savings account dedicated to routine expenses and minor emergencies, like car repairs or small hospital bills. Contact us to learn more about Roth IRA limits* and accounts or to find out how you can get started.


*Consult your tax or financial advisor