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Roths and E-Fund
Old 05-20-2008, 10:42 AM   #1
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Roths and E-Fund

What do you guys think about this plan?

I want to develop a plan to both set up an emergency fund and fund Roth IRAs for my wife and I. Is there a flaw putting so much aside per paycheck (about 400 when paid biweekly) such that it will exceed the Roth limits and slowly funneling money from the E-Fund, once it's at an acceptable level, to the Roth accounts.

The idea is that E-Fund money in excess of a couple of months of pay is not working for you as much as it could. With this method quarterly lumps could be transferred to the Roths, and there would still be savings money to account for Murphy visits.

Is this a good idea, or is it just better to fund the emergency fund and then start making direct Roth contributions?
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Old 05-20-2008, 01:32 PM   #2
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really? no one wants to comment?
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Old 05-20-2008, 01:39 PM   #3
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Well...

How long before you're to a point before you can't contribute to the Roth any more? (ie, are you close to the cap now or do you have a lot of room to run?)

What kind of e's do you anticipate? Volatile job market or stable for your career?

Worst-case scenario should be 3-6 months of living expenses. However, if you both work, then you might consider running lean for a while if one salary covers a good chunk of expenses.

Do you have credit card debts?

What are your thoughts about turning to the CC if needed?

Do you own? Do you have a HELOC? Would you draw on the HELOC if needed?

Personally, I'd grow the e-fund to a sleep-at-night number and then throw as much in the Roth as often and as fast as possible.
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Old 05-20-2008, 01:41 PM   #4
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Quote:
Originally Posted by pksublime View Post
What do you guys think about this plan?

I want to develop a plan to both set up an emergency fund and fund Roth IRAs for my wife and I. Is there a flaw putting so much aside per paycheck (about 400 when paid biweekly) such that it will exceed the Roth limits and slowly funneling money from the E-Fund, once it's at an acceptable level, to the Roth accounts.
No offense, but I don't understand what your "plan" is. Maybe restate your concept for clarity?

If it were me, I'd keep things simple and just fund the Roths at a rate that will get you to 100% of allowable contributions by the end of the year. Anything extra would go into the Emergency Fund, and (when that is to the level you want), start funding other stuff (e.g. after-tax retirement savings account, etc)

I'm assuming you've already funded any 401Ks to get any available matching funds, etc.

The three concepts that helped me:
- Start early
- Keep it simple so that the pan is on autopilot and requires no frequent fiddling/adjusting.
- Forget about it. Rebalance annually and keep up to date on tax law changes/good ideas from other people, but don't obsess over account balances.
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Old 05-20-2008, 02:31 PM   #5
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First for clarity, I'm young 24. My and my wife's job both contribute to 401k with the company profit sharing plan; it does not require that we elect any deferral from our checks to get the "match" money.

Quote:
Originally Posted by Marquette View Post
Well...

How long before you're to a point before you can't contribute to the Roth any more? (ie, are you close to the cap now or do you have a lot of room to run?)

Our combined incomes are 98000 a year so we have plenty of time ahead of us before the income caps become a problem, as long as the laws don't change drastically.

What kind of e's do you anticipate? Volatile job market or stable for your career?

We are both starting new jobs and are both young. We both are in position to be well aware of downturn in our sector, so we'll be able to get a heads up on job related emergencies. We both like our companies and want to stay with them long term.

Worst-case scenario should be 3-6 months of living expenses. However, if you both work, then you might consider running lean for a while if one salary covers a good chunk of expenses.

I was thinking never dropping below the 3 month mark, and then quarterly reducing the e-fund back to the 3 month mark using a Roth contribution.

Do you have credit card debts?

Only debt is our mortgage, and we are making double principal payments.

What are your thoughts about turning to the CC if needed?

I'd be able to handle covering short term expenses on a CC until I liquefy some assets in an emergency. I've done CC arbitrage, but do not like the stress level involved.

Do you own? Do you have a HELOC? Would you draw on the HELOC if needed?

We own a condo without a HELOC, but have considered applying for one so that it is already open/available in the case of an emergency. Because at that point we would not qualify for one.


Personally, I'd grow the e-fund to a sleep-at-night number and then throw as much in the Roth as often and as fast as possible.
Quote:
Originally Posted by samclem
Maybe restate your concept for clarity?
So the idea is grow an e-fund at $400 biweekly. Once that account has reached 3 months expenses plus say $2k we make $1k contributions to each of our Roth accounts. That means that after the base threshold is met, ever 10 weeks we'd contribute $1k.

A simpler way would be 26 biweekly efund contributions of $400 per year, or $10.4k per year. After the minimum threshold, we'd be able to fully fund Roth accounts with that money but never be below our 3 month buffer.
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Old 05-20-2008, 02:59 PM   #6
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Quote:
Originally Posted by pksublime View Post
What do you guys think about this plan?

I want to develop a plan to both set up an emergency fund and fund Roth IRAs for my wife and I. Is there a flaw putting so much aside per paycheck (about 400 when paid biweekly) such that it will exceed the Roth limits and slowly funneling money from the E-Fund, once it's at an acceptable level, to the Roth accounts.

The idea is that E-Fund money in excess of a couple of months of pay is not working for you as much as it could. With this method quarterly lumps could be transferred to the Roths, and there would still be savings money to account for Murphy visits.

Is this a good idea, or is it just better to fund the emergency fund and then start making direct Roth contributions?
I use this technique to re-fund my EF.

If you are sending $400*26=$10400 to accounts, you have $5k into Roth for spouse 1 and $5400 into EF, or $5k for Roth for spouse 1 and $5k for Roth for spouse 2 and $400 into EF.

That $400 won't grow that fast. You better have high bonuses to fund that.

I think the plan is OK. But it could be better (why isn't money in the EF already?).
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Old 05-20-2008, 04:04 PM   #7
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I just paid off my last debt and was running the DR steps. Therefore, I have my BEF ($1k) already. I just paid off my last debt, my new car, and could use that money too if we decide on that. That'd be another $200 biweekly.

We do also have bonuses at work which are completely unaccounted for in the plan, and for good reason - we don't know how much they are.

I understand that in the end there is only $400 per year growth in the account. That's why I started with the 3 month base EF. My idea behind this plan was to make sure our Roths are funded, and then in the case of an emergency we can withdraw those contributions if we have to and be no worse off.

In my head it's the difference between having a 3 month EF and funded Roths every year, or a 6 month EF and funded Roths tax year 2009 forward.
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Old 05-20-2008, 05:08 PM   #8
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Not sure if I read through completely, but here goes...

If you do not recieve any match for the 401k funds you contribute, then I say fund the roth to the max in equal payments every paycheck/month. Anything additional can go into the emergency fund.

Worst case scenario, you need to withdraw money for an emergency from the Roth. Roth contributions can be withdrawn penalty free when ever you want. The only thing you can not withdraw is the interest earned. Sure the Roth may fluctuate more than savings, but with dual incomes and no dependants, I'd be comfortable calling this an emergency fund untill the real thing is built up.
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Old 05-20-2008, 05:52 PM   #9
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ok, this is just if I was in your situation...

I would stop paying double on the mortgage. Build up the EF and Roth then.

Future cost of the mortgage, especially wrt to future growth potential of the Roth, would make me reconsider paying down at this point... your goals and mileage may vary.
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Old 05-20-2008, 05:54 PM   #10
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pksublime, your plan sounds fine to me.

hova's alternative is reasonable too. Or, put the $400 straight into a Roth, say a MM fund. Once you've maxed out the Roth, start building your emergency fund with after-tax dollars. As your real emergency fund grows, start reinvesting the Roth in more appropriate assets.

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