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Military Finances 101: Should I Use My Roth IRA as an Emergency Fund?

Managing Your Finances

No. There...the world's shortest blog post. Well maybe I should explain.

What is an Emergency Fund?

Let's start with explaining the purpose of an emergency fund. Primarily, you should set up an emergency fund to provide you with funds in the event that your income ends (disability or unemployment). You should probably have enough funds to support your essential expenses for 6 - 12 months (after COVID, I'm leaning more towards 12 months and maybe even more). An emergency fund can also be used for an unexpected and unbudgeted expense like a automobile accident or major appliance failure at your home.

The assets in the emergency fund must be liquid. There are two parts to liquidity. First of all, you need to be able to get the funds now. If you're in an emergency situation you can't wait weeks or months to get your money. This part of liquidity is pretty well understood by most. But there is a second issue. You need to be able to get to your funds now and be confident that the value of the assets have not gone down. The only thing worse than having the need to access your emergency funds is having the need and also selling at a loss to pay for the expense. This means that assets set aside for an emergency should be invested in cash or cash equivalents. This includes savings accounts, CDs (if laddered), and money market funds. You could make an argument for an ultra-short bond fund, but these are not without downside risk. I know you won't make an money on the account, but that's not the idea.

Can a Roth IRA Double as an Emergency Fund?

A Roth IRA can double as your emergency fund, but it probably shouldn't. The reason people consider a Roth as viable emergency fund is the fact that you can get your contributions out without any tax penalty and it should occur within a few days of the request. So, the first requirement for liquidity is met. But what about the second? Most people put money in a Roth IRA to set themselves up for retirement. And if that is the case, the assets inside the Roth IRA should have some risk so that you have the hope of earning returns that allow you to retire at some point in the future. And, this goes against number 2. If you're investing for the long-term, you have no guarantee that you can get the assets out without having to sell at a loss. And, if you invest in no-risk funds, you're setting yourself up to underfund your retirement.

While the Roth could double as your emergency fund, I think you're much better off keeping your emergency fund separate. Which should you do first? The safest answer is to get the emergency fund funded first. But if you're still on Active Duty, I'm o.k. with you splitting your investment/savings contributions between an emergency fund and a Roth IRA (or other investment account like TSP) until such time as your emergency fund is fully funded.

Military Finances are Different

As mentioned before, an Active Duty servicemember has less of a requirement for an emergency fund than a civilian peer. This is especially true early on in a career as you're not worrying about making promotions and being able to stay in. As your career progresses and/or your get closer to your separation date, an emergency fund becomes more important.

Just like the requirement for an emergency fund for an Active Duty Servicemember is a little different than a civilian's, your overall finances as a Active Duty Military Member or Retiree are different (sometimes a lot different) than a civilian's. That's why we think you should work with a financial advisor that works with your unique issues each and every day. If you agree, give us a call or use the button below to schedule a free initial consultation.


If you liked this article, you might find the following blog posts useful:

How to Deal With a Financial Emergency in Retirement


Military Finances 101: Emergency Funds...Yeah, They're Important


Military Finances 101: Liquidity Risk



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