You think I’m just joking, but retirement is no laughing matter unless you already accumulated millions and retired early (in which case you can laugh out loud 24/7). I think everybody should max out their Roth IRA, right now.
The Cost of Delaying
I know so many people who wait until the end of the year (some even wait until April the following year) to max out their Roth IRA. They wait, then they deposit the full $5,000 into the account. Why? Losing a year of tax free gains is the same as saying no when the cashier offers you a 15% off coupon to use on your purchase. Maybe you don’t need the money, but it’s a fool’s choice no doubt.
There are many theories of how much money a decision like this costs but it doesn’t matter. Money is money, big or small.
Okay I’m Convinced, But This is Only Possible If I’m Rich
You don’t have to be rich. All you have to do is move $5,000 of your emergency funds into the Roth IRA now.
I know. This sounds like dumb advice, but did you know that you can withdraw all of your Roth IRA contributions? Since you won’t be contributing to your Roth IRA if you actually need the funds in an emergency, you can safely assume that it will be the same thing as withdrawing it if you need it.
Investments Could Fall in Value
The caveat is that your investments could tank at the time when you need the money the most. This might happen, but I suspect that if you’ve been reading MoneyNing for a while, you are responsible enough and this worry will motivate you to save more. If you end up spending less until you save that emergency funds back up to a comfortable level, that’s just side benefit.
A Little About Emergency Funds
I always think the conventional idea of an emergency fund, while great, is a little too conservative. If ultimate safety gives you the piece of mind and confidence to take more risks elsewhere (example: career), then great. If not, then perhaps there’s a slightly better way to use your money.
Automatic Works Too
Some people also contribute to their retirement accounts via the automatic method. If this is you, ignore this as you are doing just fine. Automatic contributions have other benefits so I won’t change anything (that’s the whole point of setting it on auto pilot anyway).
I understand this is one of those “sounds interesting but this is not for me” type strategy, but what do you think?
If there are any holes with using the emergency funds this way, please point them out for everyone’s benefit.
I look forward to hearing your thoughts.
- E*TRADE IRA - Official Site