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I've been building my emergency fund through automatic deposits into a Roth IRA at TDAmeritrade. This has been working well, since the money is out of sight, out of mind, and I can easily withdraw it as needed.

But, I don't know what to do with the money in there. The interest on cash is terrible - .01%. What about Bonds, Bond Funds, Bond ETFs, T-Bill ETFs? Are these low-risk investments? Do they ever lose a significant amount of value? I'm ok with a small amount of risk.

Or, should I just dump the money in a high-yield savings account?

  • Hey everybody, thanks for your answers. This is what I've decided to to do: My Credit Union (Navy Federal) offers Roth IRA CD's at 2.96% for 20 months, up to a maximum of $18,000. I can put more money in the CD at any time. I can break the CD and withdraw funds. It takes 24-48 hours to process such a request, and I pay a penalty. This way I can get what I want, an emergency fund AND a Roth, have a good return (better than any short-term t-bill bonds or MMF's I was checking out), no risk and it's very liquid. – MattMcA Jan 14 '12 at 20:21
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    Matt - nearly 3%, you're doing great, nice find. – JoeTaxpayer Jan 17 '12 at 4:35
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Wow. It's clear I'm outnumbered.

When I'm approached with the question (and keep in mind, it's usually a couple data points and little else) "I am getting started, with no other money do I fund a retirement or emergency account?" I often suggest they put the funds into a Roth, in a money market fund, and treat it like an emergency account. If there's in fact an emergency, there's no penalty to withdraw the deposit and we're talking peanuts for interest today.

With no emergency, two things could happen:

A) As the account grows beyond what's needed for emergencies, the excess can be invested long term. B) As the investor earns more money and saves up enough to have a true emergency account separate from the IRA, the Roth can be fully invested long term.

The 'Bad idea' stems from the view that one is using their Roth as an emergency account, which of course is bad. The subtle difference is one has no retirement savings and puts their Emergency account into the otherwise unused Roth. As time passes, they've protected more funds to grow tax free.

In the end, the most important thing is whether the person is saving and not tapping for simple non-emergency things. I'd rather see a guy with $25K in his Roth and no other funds than to have $5000 in his bank account because every time it gets larger he feels compelled to spend it.

My answer to Matt is to treat it for now as you intended, low risk, CD or cash (money market).

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    +1 - using a Roth as a starter place to save money isn't horrible. As income grows, the poster can feed both retirement and an emergency fund. – MrChrister Jan 7 '12 at 4:51
  • @JoeTaxpayer I agree that it seems that using Roth IRA or Money Market is not the standard but seems to work. However, I thought a general rule for emergency fund is that you want it to be available to you quickly (as in less than a day or two). I've found with some Money Market accounts, it can take up to 6 days to get that amount transferred over to where you have access to write a check against that account. What is the transfer time that it takes to pull that income over from your Roth acc to your checking account? – Eric Jan 13 '12 at 15:36
  • At Schwab, I have an instant withdrawal/transfer to my cash account, and can write a check from it, or can transfer funds to my bank next day. (I have RMDs for an IRA, so I did this exact thing this week.) – JoeTaxpayer Jan 13 '12 at 17:32
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Why are you saving your emergency fund in a Roth-IRA? That type of fund should be for retirement. I know you can pull out your principal but that would mean in a crisis you will be destroying your retirement fund.

Remember there is an annual limit, it could take years to replenish it if you have to pay for a big repair, or period of unemployment.

The emergency fund should be kept in a very safe account. I would just keep in a high yeild account at a Credit Union

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    +1 - a Roth IRA is a terrible place to keep an emergency fund. – Fomite Jan 7 '12 at 4:38
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    Aren't both points moot if the money is simply placed in an emergency account? There would be no retirement account at all. No account to destroy, no account to replenish. – JoeTaxpayer Jan 7 '12 at 5:08
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The Roth vs not debate is irrelevant to the question. It doesn't matter where your emergency fund is kept, as long as it is liquid and safe.


I said it before in an answer to another question:

your emergency fund is not an investment -- it's your safety net

This answer also says it well:

an "emergency fund" is just that... for emergencies... NOT investment.

While it "hurts" not to have your emergency money making more money... its MORE IMPORTANT to have quick access to it.


So at TD Ameritrade, just park it in their FDIC deposit account. It will not earn any meaningful interest (at least until rates rise), but you'll be able to have access to it when you need it.

Note that I would caution against putting it in a money market mutual fund. They're safer than many other investments, but they're not FDIC insured against loss and there is a potential for temporary loss of liquidity.

In late 2008 when the credit markets collapsed, a lot of people suddenly became unemployed -- and needed access to their emergency funds. When Lehman Brothers went bust in September, the Reserve Primary Fund (with billions of dollars in their fund) "broke the buck" -- they lowered the price of shares below $1, meaning investors lost principal. The worst part is that investors were not as liquid as they wanted to be: the fund froze and it was hard to get money out.

The lesson to take away from this is that one of the times you're likely to need access to your emergency fund is during a macroeconomic crisis. This is also the time when any investment that isn't guaranteed safe may potentially be (at least temporarily) unavailable or decline in value. Emergency funds should be 100% government insured.

When you have your Roth funded to the point where there's extra money beyond the emergency fund, you can start investing in higher-yielding vehicles: stock or bond index ETFs would be a good start. But then that part of your Roth starts to look like a retirement account and not an emergency fund.

If it were me, I'd open a Roth at a stable local bank and just keep it in their FDIC insured money market deposit account. Then if I wanted a slight boost, I might put the "upper half" of my emergency fund into short term CDs, but even CDs aren't worth much at the moment.

  • +1 right, once there's an amount greater than emergency funding, that money can be invested. – JoeTaxpayer Jan 17 '12 at 4:33
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You could put in in a Money Market Fund. These are designed to always be $1 per share, and not lose money. Of course, it still, very rarely, happens and is called "breaking the buck" when they do.

Sounds like the high yield savings is the way to go. The rates will be the same as what you can get from a Money Market Fund, but you also have the added advantage that the account is FDIC insured.

BTW, using a Roth as an emergency fund is a terrible idea. It is true that, since you already paid taxes on your contributions, you can withdraw those contributions without incurring penalties. However, you have to file paperwork to do it, and since it's not common, the IRA custodian is likely to screw it up. Plus, you have to keep track of what were contributions, and what was investment returns, to not run afoul of the penalties. And it will take time to do it, which you may not have in an emergency.

Considering you're only looking at getting 1% interest anyway, there's no reason to use a Roth account as an emergency fund. You can set those same automatic deposits into a savings account.

  • +1 - Faster on the draw than me. Wish I typed faster. ;) – Rick Goldstein Jan 7 '12 at 0:50
  • Hmm.. Much of this I took into account when I set it up. TDAmeritrade let me makes early divestments pretty easily, no paperwork involved. It also keeps track of how much I have deposited into an account per year, so I'm not too worried about running afoul in regards to paperwork.... – MattMcA Jan 7 '12 at 1:11
  • @MattMcA Ok, so they make it easier, that's cool. But what's your thought process going in to putting your emergency fund into a Roth? – Patches Jan 7 '12 at 2:26
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    My thought is similar to what JoeTaxpayer states below. I'm building myself up financially. I won't be able to save both an emergency fund and a Roth IRA. So, I thought of combining them. If I don't have an emergency, I have the money stored in a tax-free environment. Also, I didn't state before, but the Roth IRA is not my only retirement. I have 15% of my gross put into a Roth 401k at work. – MattMcA Jan 7 '12 at 19:18
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    @MattMcA Ah, I see. Makes sense, actually. I would still keep some of the emergency fund at hand, if I were you, just to cover those small emergencies that come up all the time. I still think the high yield savings is the best option, unless you wanted to stay with Ameritrade. Then check out the money market funds. ETF-wise, I wouldn't go with anything more variable than SHY, a 1-3 year short term gov. bond ETF. There's also SHV, an even shorter gov. bond etf, but at 0.07% distribution, it just doesn't seem worth it. Another option is that you can get 1-month CDs via Ameritrade. – Patches Jan 7 '12 at 21:03
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A Roth IRA is intended for retirement. Before age 59.5 (I think), you can only withdraw the amount you deposited without penalty. It's great you're saving in a Roth, but you shouldn't put savings in there that you will need before you reach sufficient age. And since it's long-term, you can invest in things you expect to grow over the long term, like equities.

You should keep emergency funds either in federally insured, extremely liquid accounts (bank savings) or money market funds (which aren't insured, but are close enough to zero-risk). Yes, the interest rates are terrible right now. But anything else would potentially leave you with insufficient funds in the event of, you know, an emergency.

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