Build Your Retirement Portfolio While Saving For Emergencies: ‘A Roth IRA Can Double As An Emergency Fund.’ Is That True?

Summarize and humanize this content to 2000 words in 6 paragraphs in English Roth IRAs are some of the best tax-advantaged accounts that investors can access. Although you have to pay taxes on your Roth IRA contributions, the withdrawals are tax-free. That tax-free status extends to any capital gains and dividends. A recent “CNBC: Your Money” video claimed that Roth IRAs can double as emergency savings accounts. The idea is that the money in a Roth IRA continues to grow tax-free, and you can then take money out of the account for emergencies. However, there are some flaws within this assumption that are worth noting for people who want to abandon emergency savings accounts in favor of a Roth IRA. Don’t Miss: Every investment comes with risks and potential returns, and the mentality behind both of these accounts are different. People who put money into a Roth IRA want it to grow as much as possible. You don’t have to worry about any taxes on dividends or capital gains, so it’s the ideal place for growth stocks and ETFs. However, people want more stability with their emergency savings accounts. For most people, a good emergency savings account is a bank account that yields 3%-4% APY. While you can pull money from a Roth IRA during an emergency, it’s often a bad idea to sell stocks during market corrections. Viewing a Roth IRA as an emergency savings account makes you vulnerable to market timing. People who follow this strategy are essentially hoping that their Roth IRAs generate enough gains before they are needed for an emergency. Trending: BlackRock is calling 2025 the year of alternative assets. One firm from NYC has quietly built a group of 60,000+ investors who have all joined in on an alt asset class previously exclusive to billionaires like Bezos and Gates. You can withdraw money from a high-yield savings account at any time. Most banks limit you to six withdrawals per month before a small fee applies for additional withdrawals. However, most consumers can manage to stay below this threshold. However, a Roth IRA’s funds aren’t accessible until you turn 59 1/2 years old. While you can technically withdraw from a Roth IRA at any time, withdrawing before you turn 59 1/2 years old will result in a 10% penalty. However, this 10% penalty only applies to earnings (i.e., dividends and capital gains), not your contributions. Young adults should avoid viewing a Roth IRA as an emergency savings account due to the penalty fee. Another detail to keep in mind is the Roth IRA’s contribution limits. The IRS adjusts this limit periodically, and you will qualify for catch-up contributions when you turn 50. Right now, you can contribute $7,000 per year in a Roth IRA. That annual contribution limit goes up to $8,000 per year if you are at least 50 years old. See Also: Can you guess how many Americans successfully retire with $1,000,000 saved? The percentage may shock you. It’s important to keep this number in mind when treating a Roth IRA like an emergency fund. If you pull $30,000 out of a high-yield savings account, you can replace the funds at your own pace. You could theoretically put $30,000 into your bank account in one year if you wanted to replenish it. However, you don’t have that option with a Roth IRA. If you pull $30,000 from a Roth IRA for an emergency expense, you’re still limited to a $7,000 annual contribution. It would take more than four years to replenish your account, but you could have made those contributions even if you didn’t pay the emergency expense. Roth IRAs and high-yield savings accounts are different financial instruments with different objectives, strengths, and weaknesses. It’s not a good idea to treat them as one in the same. Luckily, the low annual IRA contribution limits make it easier to build up a Roth IRA and a high-yield savings account. Read Next: UNLOCKED: 5 NEW TRADES EVERY WEEK. Click now to get top trade ideas daily, plus unlimited access to cutting-edge tools and strategies to gain an edge in the markets. Get the latest stock analysis from Benzinga? This article Build Your Retirement Portfolio While Saving For Emergencies: ‘A Roth IRA Can Double As An Emergency Fund.’ Is That True? originally appeared on Benzinga.com © 2025 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.