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I am considering keeping my emergency fund in a Roth IRA (as described in this question) in order to maximize the amount of capital I can potentially invest tax free in the future. However, this would involve a significant chance of having to make early withdrawals of my Roth IRA contributions.

This could lead to a few confusing situations:

  • (A) I could contribute money, earn some interest, and then have withdraw some or all of the contributions made so far in the year.
  • (B) I could end up withdrawing contributions from a previous year, and then pay it back.
  • (C) I could contribute some, have to withdraw it all & more, and then want to return some (or all) before the end of the year.

In case (A):

  1. What happens to the interest my contributions earned in the Roth IRA (and which remain behind in the account) between the time of my contribution & my withdrawal
  2. Does the money I contributed at the beginning of the year still count against my contribution limit after it is withdrawn (Say I deposited $5,500 in January and withdrew $5,500 in June. Can I put the money back in by December)?

In case (B): Does the money I return to the Roth IRA count against my contribution limit?

What about case (C)?

Forgive me if this question is a little long, the whole thing just seems so confusing.

  • B) does not work. You cannot "return" money to the IRA once it has been withdrawn unless you make a contribution for year X, withdraw it (and the gains therefrom) before the tax deadline for year X as a change of mind, and then contribute it again as a contribution for year X before the tax deadline. The gains, if any, are a premature withdrawal and subject to a penalty. It is a bad idea to keep emergency funds in a Roth IRA. Also, duplicate of Should I keep my emergency fund in a Roth IRA. – Dilip Sarwate Jun 15 '17 at 8:55
  • @DilipSarwate It's not a duplicate, just a continuation of that question. – D Stanley Jun 15 '17 at 13:15
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    Shouldn't these confusing situations (and the likelihood of screwing something up and owing taxes and penalties) answer the original question? No, you should not keep your emergency fund in an IRA. An IRA is meant for retirement, meaning you put savings in there, leave it alone, and let it grow, – D Stanley Jun 15 '17 at 13:17
  • There are other questions that this is a duplicate of too, for example: money.stackexchange.com/questions/77635 – Nathan L Jun 15 '17 at 13:45
  • I made the mistake of withdrawing from my IRA when I thought I'd need the money to pay taxes that year. Turns out I didn't need it and I was unable to put it back since 60 days had passed. I've now lost the opportunity for that money to gain tax-free interest. Don't make the same mistake. – user9760 Jun 15 '17 at 16:10
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Generally, you have 60 days to return funds.

If you've been stowing away money in to a Roth IRA and an emergency strikes you pull out contributions sufficient to tackle the emergency while leaving at least the earnings in there. You've never paid taxes on these earnings and the earnings will continue to grow tax free.

If you've been stowing away money in a vanilla taxable account and an emergency strikes you pull out whatever amount to tackle the emergency. You've been paying taxes on the earnings all along but there's no paperwork.

You can't replace the money in the Roth IRA (outside the 60 day limit except for some specific same year rules that you should iron out with your custodian) but you also haven't lost anything. Either way in the event of an emergency the funds are removed from an account, but in one case you haven't been paying taxes on gains.

IF you want to go the route of a Roth IRA wrapper for your emergency fund you shouldn't be touching the funds for small events, tires for your car and the like. If your goal is to juice the tax free nature of the Roth IRA wrapper for as long as you can then repurpose the money for retirement if you never experienced an emergency with the understanding that you may have to gut the account in an emergency, that's fine. If you expect money to routinely come in and out of the account a Roth IRA is a horrible vehicle.

  • Does the 60 rule apply to money I deposited the same year I make the withdrawal, or only to contributions from previous years? I have seen suggestions that withdrawing funds in the same year they are contributed, simply causes them to be viewed as if they were in a taxable account all along. I understood that to mean I could still put it back later the same year, though any gains from the earlier part of the year would be taxable. – lzam Jun 15 '17 at 16:45
  • @Izam, Yes. You can take your current year contributions back out but your custodian needs to code things a specific way for that to work. The best way to deal with things is to keep the money in a taxable account until year end then make a lump contribution just before the deadline rather than incrementally contributing. – quid Jun 15 '17 at 16:48

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