4. Roth IRA
A Roth IRA is traditionally thought of as a tool for building your retirement nest egg but there are some benefits to using it as your emergency fund. In terms of growth, there’s the potential to see much bigger returns since you’re able to invest money in a Roth in a variety of mutual funds and other securities. If you’re earning 10 or 15 percent annually, that’s a substantial jump from what you’d get with a savings account.
The tricky part about using a Roth as an emergency fund is navigating the tax rules. As long as your account’s been open for at least five years, you can withdraw your contributions at any time without a penalty. If you pull any earnings out before age 59 1/2, you’ll have to hand over 10 percent to the IRS. That’s a pretty decent premium to cover an unexpected expense.
The other issue is how it would affect your retirement strategy if you did have to make a withdrawal. While you can add the money back eventually, you won’t be able to recoup the lost earnings you would miss out on by reducing your balance. If you’re pulling out a large amount, that can put you at a disadvantage down the road as you get closer to retirement.
Finding a suitable place for your emergency savings requires a little homework and a careful evaluation of what your goals are. If you’re after bigger earnings and you don’t mind gambling a little, a Roth might be the way to go. On the other hand, if you prefer to play it safe then an online savings account, CD or money market offers the peace of mind you’re after with the added benefit of higher interest.