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Question for the Money Doctors

Question submitted on Dec 15, 2022.


Should I open a Roth IRA to save for emergency fund? Hypothetically, in the event I need the funds, how much time before the money can be withdrawn from the time I open the Roth IRA?


Opening a Roth IRA is certainly an option to use as an emergency fund. However, in general, a Roth IRA is a great avenue to accumulate retirement funds that are tax free as long as all the requirements are met.  With regards to using a Roth IRA as an emergency fund, there are some rules and considerations to bring to your attention.  Direct contributions (i.e. “principal”) may be withdrawn at any time without tax or penalty as distributions are deemed to come from "principal" prior to any earnings.  Eligible distributions of earnings, meaning they are free from tax and penalty, generally must be after an initial five (5) year account requirement is met and the account owner must also meet the age requirement of 59 -1/2 years of age. If they had the accounts for the required length of time, qualified withdrawals may be made in any amount on any schedule.  However, there may be taxes and/or a 10% penalty on any earnings you withdraw depending on whether or not you take a “qualified distribution.”

IRS Publication 590-B outlines the below in greater detail.

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

  • It is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit
  • The payment or distribution is:
    • Made on or after the date you reach age 59½
    • Made because you are disabled
    • Made to a beneficiary or to your estate after your death, or
    • One that meets the requirements for a first-time home purchase (up to a $10,000 lifetime limit) 
  • Note there are exceptions the above, and you may not have to pay the 10% additional tax if one of the following have been met:
  • You have reached age 59½
  • You are totally and permanently disabled
  • You are the beneficiary of a deceased IRA owner
  • You use the distribution to buy, build, or rebuild a first home
  • The distributions are part of a series of substantially equal payments
  • You have unreimbursed medical expenses that are more than 7.5% of your AGI (defined earlier) for the year
  • You are paying medical insurance premiums during a period of unemployment
  • The distributions aren't more than your qualified higher education expenses
  • The distribution is due to an IRS levy of the IRA or retirement plan
  • The distribution is a qualified reservist distribution


As noted above, Roth IRAs are subject to what is called the 5-year rule. This means your Roth IRA must be at least 5 years old before you can withdraw any of the earnings. If you are over the age of 59 ½ but have not held the Roth for more than 5 years, the earnings will be subject to taxes but not penalties.


In short, if you are over 59 ½ and have held the Roth IRA for longer than 5 years, then all withdrawals (both your contributions AND earnings) are tax and penalty free, making the Roth IRA is a useful retirement savings tool. We recommend working with a CPA/PFS to assist with your individual situation and how Roth IRAs may work towards your financial goals.

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