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EF vs Roth IRA

July 4th, 2014 at 08:29 am

After posting my goals elsewhere, many people jumped on me about my emergency fund goal of 3 months expenses or $4,500 in a savings account.

They said since I am not maxing out my Roth it would be wiser to stick it in there for more growth, and no taxes.

After some debate, I think I have to agree. Not only would the growth be higher, and no taxes, but my income qualifies for the savers credit. So I would essentially be getting a 20% return just on that!

I currently have $1,700 in a savings account for an EF. My new plan is to get it to $2k or $3k (undecided) then put the remaining EF goal into the Roth.

I feel safe with only keeping that much cash because I will also have all our other saving items in cash, such as the animal fund, and vacations, etc, that I could pull in an emergency. We always keep quite a bit of cash on hand at any given time, and we also have the LOC and credit cards which could float us a few days if we needed to pull money out of the Roth.

I figure if we end up needing to pull from it, which is unlikely, then I really did not lose anything that was suppose to be for retirement anyway. If we dont end up needing it, then that is more tax free growth for my retirement!

I know some people are highly against this, but I feel pretty stable in our jobs, and since we have such a low income anyway, technically we could go out and get any old min wage job and pay our bills in the case of job loss.

My question is, should I keep $2k in reserved cash or $3k in reserved cash for the EF?

5 Responses to “EF vs Roth IRA”

  1. creditcardfree Says:

    Would you be putting the extra $1K in the roth instead then if you only did the $2K EF? Is so, I think $2K is fine, but over time you will want a larger EF, but getting started investing for retirement is important too.

  2. MonkeyMama Says:

    I disagree with the growth advice. But I am sure I was one to recommend that you put your EF in a ROTH. Just leave it in cash so you can access it in an emergency. You move it over to investments once you have a chance to build an appropriate emergency fund outside of your retirement accounts. (Just making sure that you know you can keep cash in a ROTH).

    We did this at some point in time where I would not have felt comfortable being so cash poor. But it was a lot to give up the ROTH benefits. So we threw the cash into a ROTH. After a few years we no longer considered that part of our EF and we invested the money. IT's a nice win-win situation when you are starting out.

  3. MonkeyMama Says:

    P.S. You have until April 2015 to fund your 2014 ROTH. I would decide at that time, how much to keep in cash. Based on your circumstances at that time, and based on maximizing your retirement tax credit. Who knows. Maybe you will receive some windfall and not need to use your ROTH for an EF. For that, I would make it a last minute decision. It is kind of a "last resort" thing.

  4. klarose Says:

    Yes I would put the extra $1k in the Roth if I only left $2k in cash. Technically I would still want my $4.5k goal, so there would be $2k in cash, and I would add an additional $2.5k to our Roth.

    Right MonkeyMama. This wouldnt be a long term solution, but it would help us get the free tax money, and also get our retirement kick started. Eventually we would not consider it as EF, as we continued to build our cash outside of the Roth, and we would just roll it into our retirement money.

    It just seems silly to waste all that tax free space, especially with the savers credit.

  5. creditcardfree Says:

    I agree you do want that saver's credit...it is a nice bonus!

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