For the past several years, I haven’t maxed out my retirement accounts. I thought it was more important to have an emergency fund available. I’m starting to regret my decision since I can’t go back in time and make retroactive contributions into my Roth IRA. I am only allowed to fund my various retirement accounts to a certain point although I could save as much as I want into a regular savings account. When I’m older, I can make catch-up contributions. I plan to use money in my ordinary savings account to boost my retirement savings contributions. According to an article by U.S. News & World report, a Fidelity study showed more people are saving for emergencies since the recession. People who lose their jobs are especially vulnerable without an emergency savings account, according to experts. However, I think I could have been smarter about my emergency fund.
Using a Roth for emergencies
If I saved money in a traditional IRA or 401(k), it would be costly to take money out for an emergency. I would have to pay fees to set up a 401(k) loan. However, I can take out my contributions to a Roth IRA. It makes sense to fully fund my Roth IRA each year since I can access the money anyway. I am taking money out of my emergency savings account to fund my Roth.
Keeping a percentage safe
Since I am using my Roth partially as a savings account, I am keeping some of the money in a money market fund within the Roth account. I’m allowing 100 percent of the new money I contribute to remain in the money market account since we are in the middle of an aging bull market. I’m not worried about how much money I could make in stocks as much as how much I could lose. Having part of my retirement money in a money market is just another form of liquid savings.
Taking advantage of my 401(k)
I can’t max out my 401(k) because I don’t have enough money to fully fund it. However, I am saving as much as I can into the Roth 401(k). I would have to liquidate the entire account if I needed to access the money for an emergency. Tapping my Roth 401(k) would, therefore, be a third choice. My first option would be to take money out of my Roth IRA. My second choice would be to take a loan from my Roth 401(k).
Although everyone is different, I don’t feel as though I need more than $2,500 in an emergency fund. If I am short on the money to max out my Roth, I get it out of my emergency savings. I basically treat saving for retirement as though it is a financial emergency. Retirement may not seem like an emergency now in my 40s, but my future self will be glad I didn’t neglect her financial security.
More from this contributor:
My Half Million Retirement Miscalculation
Investing in a Rigged Market
After Losing a Pension, I Got Serious about Saving