Roth IRAs offer flexibility
Setting up and maintaining an emergency savings account is like filling up a leaky bucket. It's never going to be full, and if you don't pay close attention, it can be emptied quickly.
In a pinch, a Roth IRA could provide some quick cash. That's because Roth contributions can be withdrawn penalty-free at any time.
"When you get into earnings or growth, that's when you're looking at potential income taxes and potentially penalties as well," says Maria Bruno, senior investment analyst with Vanguard's Investment Strategy Group. "We don't encourage that because it really should be a vehicle that's earmarked for retirement. The reality is that it does offer some flexibility."
To take out more than just the contributions, investors must be at least 59 1/2 years old and the account must have been opened for five years. But there are some qualified withdrawals if you don't meet the age or holding period requirement.
"One of them is, for instance, a first-time home purchase up to $10,000. Another is postsecondary education expenses," Bruno says.
There are some other circumstances as well, according to the IRS:
- Unreimbursed medical expenses that exceed 10 percent of adjusted gross income -- 7.5 percent for those who are 65 or older.
- Back taxes