Do you often find yourself sitting at an impossible fork in your financial road of savings or quick cash? Easily accessible debit cash in emergencies is always a comfortable safety net, but what about the long-term growth of a retirement fund? When you find yourself depositing money, is it an impossible task to decide just how much goes where and which fund is more important to you? You’re not alone. Many people struggle with the challenge of not being able to touch a long-term retirement account but the need for quick cash. There is, however, a middle ground you can utilize to make the most of your money, your way.
An IRA Roth account is a special retirement fund that will allow you to escape the after-retirement taxes once you start withdrawing money. If you are willing to pay taxes now, once your golden years arrive, you will be tax-free when it comes to withdrawals for the rest of your days. It is tax efficient, but how does it help with your dilemma? Well, you can actually move as much as $5,500 individually from your emergency fund to your Roth IRA, and you are able to withdraw this contribution at any point so long as the investment earnings consistently remain in the account. And unlike many IRA savings accounts, this one comes with tax flexibility that caters to your income and needs.
There are some things to keep in mind, however, while you’re taking advantage of this excellent opportunity. And the first thing is to make sure you’re making it count. And that means maximizing the contributions you make each year. If you deposit $5,500 in 2016 but only manage $1,000 once the deadline passes in 2017, that’s your contribution for the year. This means, plan ahead. Which paychecks are you going to contribute? Which accounts will you borrow from? How much do you intend to have set aside by a certain date?
Keep all this on record and hold yourself to it because once the opportunity passes, it’s gone forever until next year when you can make your next contribution. This also means, and it should go without saying, that you need to make sure your paperwork is complete and correct and on time as well. Remember that you’ll need to report your account activity accurately and correctly when the time comes.
Another warning is that you can only withdraw your contributions. You can do this freely without penalty, but if you withdraw earnings before the age of 59.5 years old, you will be penalized. It’s a simple rule we’re taught the second our parents hand us our first debit card: don’t take out more than you put in.
Another thing to keep in mind here is you can’t withdraw 401k rollover funds younger than 5 years either. A similar penalty applies to doing that and it falls under the same rule: take out only what you put in when you need it.
Keep Your Investments in Check
The point of the emergency fund in a Roth IRA is emergencies. Specifically, it identifies job loss or property loss emergencies. You don’t want to be careless with emergency funds by investing them in stock and never seeing them again. Retirement funds are about maturity, and it takes a level of wisdom to work them properly. Don’t make rookie mistakes. Be patient and save up.
And above all, understand why you have taken the time to do this. Retirement is about waiting and getting small doses of help over the course of many years. This is a way, however, to keep the present in mind. You can work towards your IRA savings accounts for retirement but you’ll also have your emergency fund through an IRA Roth account. The smartest, most fiscally responsible person understands that life and money is about the long run but also about needing to protect yourself and your family in the now. The Roth IRA account can help you do both these things as long as you use it wisely and keep track of your paperwork.
Remember, this is your last resort fund and also a gift to your future self and your future family. Use it wisely and it’ll be the best decision you have ever made.
Featured Image Source: Thinkstock/karenfoleyphotography