It's best to fund an IRA or emergency fund account?

[Nanita8140]

My coworker's son has been living out on his own for a year now(he's 24 year old), and recently he told me that he has $20,000. in an emergency fund(regular Money market account). I asked him what kind of retirement account(s) he was funding...answer...none. His job does not offer a 401K plan and he is clueless and somewhat fearful about the stock market. I told him that perhaps he can start off by getting a Roth IRA CD at least. He doesn't like the idea of having his money tied up until he's fifty-nine and a half. Correct me if I'm wrong, but can't you withdraw "the contribution" in a Roth IRA without penalty? I find that if this is so(as I believe it to be), that this can serve as retirement/emergency account. Also, aren't Roth IRA also protected from bankruptcy?....I hope I gave the kid the right information.

 

[jIMOh]

I would fund retirement accounts first. It took me 8 years to get my EF started and 11 to be nearly fully funded. Those 11 years got me 200k of 401k and Roth accounts.

 

[Coach]

Nanita, your advice was good. Roth IRA contributions can be withdrawn at any time without penalty, so could serve as an emergency fund until such a time as he can afford to fund both.

Coach

 

[Nanita8140]

Nanita, your advice was good. Roth IRA contributions can be withdrawn at any time without penalty, so could serve as an emergency fund until such a time as he can afford to fund both.

Coach

Well I'm glad I was right Coach! I like this kid...he has potential. He works two jobs(one full time and a part time job during the weekend). He's also very cautious with his money and from what I see he has mastered the art of LBYM. I've talked to him about the benefits of an IRA so that he can get an early start on his retirement and I've also recommended some books for him to read. Unfortunately his parents have been trying to keep up with the Joneses so he is not getting any help from them.

 

[Zoocat]

He could fund a ROTH IRA up to his limit every year and still have a hefty emergency fund. The EF is essential these days when job stability is questionable.

 

[chinaco]

fund both.

He needs both.

 

[Art G]

Withdraw Without Penalty

 

[Art G]

Fool.com: All About IRAs - The Roth IRA Withdrawals

 

[ziggy29]

fund both.

He needs both.

Good advice, but if you can't afford to save much more than $5,000 a year, you might as well use the Roth as a temporary emergency fund (since contributions can always be pulled out tax-free and penalty-free) until you can afford to fund both. If one does that, they probably want to stay conservative with the investments in the Roth.

Once they can save a total of $7,000 a year, for example, they can put $2,000 a year into the dedicated emergency fund and $5,000 into the Roth, and slowly increase the "traditional" emergency fund balance over time until it's fully funded. At that time the actual emergency fund is fully funded with the requisite 3-6 months of expenses, the balance in the Roth would become strictly a "retirement fund" and the investments in it could shift to longer-term, riskier instruments.

 

[CitricAcid]

Joining the consensus by saying that to fund the Roth before all else, because you can take the money out at any time penalty-free. If he is worried about losing money in the Roth for his EF, then put the money into CDs or MMFs or high-grade corporate bonds, anything with a lower risk profile. Also, it is a good idea to start up the Roth so that over time as he gains more spending ability, he can fund both the Roth and a new EF (turning the old EF into his retirement), a way to kind of kill two birds with one stone.