Emergency Savings is one’s first basket of gold. Whether you read financial blogs, finance education books, or listen to financiers, almost universally, the first step of organizing or starting your financing after paying off debts is to set up an emergency plan savings for funds to last at least six months, if not more. These are the funds you go to in a pinch and those that make you feel secure.
Using a Roth IRA as an emergency savings account can be a beneficial strategy for those who:
| Legacy Education | Young Adults |
|---|---|
| Wish to establish their legacy by including their children and teaching them about finance and investing and giving them autonomy with their investments. | Individuals who are 18 or older, have earned income, a low tax liability, and low monthly expenses. |
With a Roth IRA, contributions are not tax-deductible, but qualified withdrawals on earnings (those made after the account has been active for at least five years and the account holder is over 59.5 years old) are tax-free. This means that the original contributions to a Roth IRA can be withdrawn at any time without taxes or penalties, while the earnings on those contributions are subject to the 5-year rule and the age requirement for tax-free withdrawals. This can make a Roth IRA a useful tool for saving for emergencies, especially for young individuals who may not be suited for a traditional IRA, need to save for an emergency plan, or want to start their personal investment.
It is important to note that Roth IRAs have income limits for contributions and that non-qualified withdrawal of earnings are subject to taxes and penalties. Additionally, it is generally a good idea to invest in low-risk assets (such as short-term bonds) rather than stocks when using a Roth IRA as an emergency savings account.
If you are a parent who wishes to set up an account for your children, you might be inclined to open up a UTMA/UGMA account or a vanilla Savings account. While if you are a young adult, you might consider opening a vanilla Savings account or would want to go for a Traditional IRA account. Roth IRAs are seldom the first-choice option.
| UTMA/UGMA | Traditional IRA | Savings/Checking |
|---|---|---|
| UTMA/UGMA accounts are great by design, but they are fully taxable and take away any individual control from the child. | Traditional IRAs are great in their own right, but if your contributions are deductible, if withdrawn early the deductible portion has to be re-taxed (since you get a benefit for the contribution) while the earnings portion is subject to the same rules as a Roth. | A vanilla Savings/Checking option is the easiest but offers no further potential growth or benefit. |
Meanwhile, using a Roth IRA as an emergency savings plan can:
This is a great way to start your personal finance journey or begin teaching your descendants the important of money management and progress your legacy. Furthermore, if you have not contributed to any IRA so far, you can double down and contribute the prior year (before the tax filing date) and current year limits to maximize this plan.
If you want to learn or discuss more, don’t hesitate to contact your tax advisor or reach out directly to us.
Best,
Joseph Feinberg, Tamara Stein, and Mark Zhuravlev
The Feinberg Stein Group is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC (member FINRA and SIPC). Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.
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