Saving for retirement can be tough while you are trying to build an emergency fund, pay off student loans, car loans and other expenses. But we all know the importance of saving early. The earlier you start saving for retirement, the faster your money will compound and grow.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
