Because it gives you the option to withdraw funds as needed — for example, if you have an emergency — a Roth IRA can be a useful tool for saving for all sorts of goals, not just retirement. Here are three reasons to house your emergency fund in a Roth IRA if you otherwise wouldn’t be maxing out your retirement account contributions.
1. Contribution limits: use it or lose it
You’re allowed to contribute a certain amount to your IRA every year. For 2020, that limit is $6,000 if you’re under 50, and $7,000 if you’re 50 or older. But if you don’t make your contributions before the annual deadline (the date that federal taxes are due for that year), the ability to use that year’s cap disappears forever.
Over time, you want to maximize the amount of money in your tax-advantaged retirement accounts. By putting your emergency savings into a Roth IRA, you can do that.
It’s possible you won’t have to tap your emergency fund for several years. And if your financial picture improves in that time, you may be able to both max out your retirement accounts and build a proper emergency fund in a regular savings account. In effect, you’ll have managed to save more for retirement than you otherwise would’ve been able to.
If you do have to use your emergency fund, you’ll be no worse off than if you left it in a traditional savings account. There’s no downside.