Roth IRA as Savings Account? Yay or Nay?

by Erika Torres

house fund I have a quick question for you guys.

Would it be wise or risky to use the Roth IRA as a savings account?

Eric and I opened up Roth IRA’s last year as part of our 2012 goals. At the beginning of the year, I deposited $100 into each account and that was that. I haven’t touched them since.

We’ve just had other things to worry about, like paying off debt and saving up. I’m not terribly concerned about the loss in retirement savings, since we are both in work-sponsored pension plans (if I work here 30 years, I’ll retire and receive 75% of my salary annually for the rest of my life) , plus I have my 403 (b) with the full company match.

I do plan to contribute to our Roth IRAs, but realistically, that’s not going to happen any time soon.

That being said, we have kicked into high gear our goal of saving up for a house and putting together a down payment fund.

Our online savings account yields us something like 0.6% in interest. It’s pitiful.

Our Roth IRA on the other hand, yielded us a 15% return–in one year!

I know that a 15% return is not the norm. But I’m wondering, should we be putting some of our savings into the Roth IRA* since we can take out our contributions without penalty?

Or is it simply too risky? Would you recommend putting in a portion of our savings into the Roth IRA? Or none at all unless we’re prepared to lose it?

Realistically, we wouldn’t be touching this money for at least another year, and even more realistically, probably like two years.

Does anyone use their Roth IRA as a savings account or emergency fund?

*For those who may not know, a Roth IRA is an individual retirement account that you contribute to with after-tax deductions. You are able to take out your contributions at any point, tax-free (since it’s already taxed money, unlike a 401K) but you cannot touch the earnings. So if you put in $2,000, and make $50 in interest, you can take out $2,000, but the $50 has to stay.



Favorite Posts, Mentions, and Top Comments Week of 7Apr2013 | Evolving Personal Finance April 14, 2013 - 6:39 am

[…] from Newlyweds on a Budget asks whether using a Roth IRA as a savings account for a house down payment is a good […]

Vikram Pandit April 11, 2013 - 10:31 am

I agree with Emily above. You seem to be blending a Roth IRA with an investment account. A Roth IRA is just a savings vehicle that can be invested in virtually anything. You could use the money to invest in stocks which are risky, bonds which are less risky, a money market account which is almost no risk. In any case, it is to your advantage to place money in a Roth IRA before a taxable brokerage account as you don’t have to pay taxes on any of the gains. As you mentioned, you will be able to pull out your principal without any penalties for your home purchase or anything else, but not the gains. If you are banking on this money for your house down payment, put the money in something low risk (i.e. CD’s) so that you won’t lose it. But filling up that Roth space is something you can only do once a year, so it is highly recommended.

TeacHer April 10, 2013 - 5:09 pm

Voice of dissent here: I think it’s a good idea, and am considering making my Roth my primary savings account. I’ve withdrawn contributions from my Roth IRA for the past two years for two emergencies that popped up with zero problems. Also, I tend to think really, REALLY hard before withdrawing from my Roth, whereas with my regular savings account I don’t scrutinize the withdrawal (which may be for an emergency or not) nearly as much. If I’m withdrawing from my Roth, it’s definitely a REAL emergency.

The only thing to consider is that once you take the money out, you can’t replace it. So, let’s say you put $5,000 into your Roth in 2012 and then end up having to withdraw 1K for something. That’s fine, but you can’t turn around and put that 1K back in, even if the year isn’t up yet.

But that’s the only real drawback I see.

Mrs. Pop @ Planting Our Pennies April 10, 2013 - 3:06 pm

I wouldn’t do it.

In general, any money we need within more than a few years we keep out of stocks. But beyond that we don’t like to assume taking anything out of the Roth until we reach traditional retirement age. Because you can’t put it back later and for us it’s a mental wall that once it’s breached might seem too easy to want to do all the time.

Emily @ evolvingPF April 10, 2013 - 2:36 pm

You don’t seem to be making a distinction between retirement accounts and investing in the stock market. If you want a better return and don’t mind the risk (I probably would!), why not just use a taxable brokerage account?

Sure, you could use the Roth as a savings vehicle if you are confident you will only want the money for the purchase of your first home. But if you decide to repurpose the money you will get hit with fees, and I doubt the taxes you save on the earnings over just a year is worth that risk.

It’s not crazy, but I don’t think it’s a great idea. There are other good options.

ND Chic April 10, 2013 - 2:29 pm

I think its a bad idea. I think retirement money should be off limits. If you want to take advantage of the market, you can open up a retail account. However, the stock market is at close to an all-time high so is there going to be another 15% gain? Its possible but not very likely in my opinion.

One Frugal Girl April 10, 2013 - 1:36 pm

I’d say it’s too risky. While returns are great now you just never know when things will take a turn for the worse. If you need the money in the near future I wouldn’t risk it, but then again I’m pretty risk averse.

Tanner April 10, 2013 - 1:29 pm

Asides from the fees you will incur from withdrawing from the IRA, I’d still say it’s a bad idea to use it as some sort of liquid funds. Get a CD, money market account or a general investment account instead. You seem to be very sure this money will be withdrawn, so I’ll vote no. Though 15% sounds nice, it can also mean -15% the following year.

Amy April 10, 2013 - 12:33 pm

Our situation is a little bit different. I have an employer sponsored plan, a Roth and a indivisual brokerage/money market acct. We’re opening a Roth for my husband because he has no retirement acct. right now. We also have an emergency savings acct, which gets that almost 0% interest like you mentioned. Since my employer sponsored contribution is deducted pre-tax, I don’t have access to that. We consider our Roth accts untouchable, but can access the brokerage w/out penalties. You might want to open a brokerage/money market acct as a savings acct to get the higher interest?

krantcents April 10, 2013 - 9:50 am

Everything depends on when you will need those funds. If you need them in less than 5 years, you should not invest.

Ceci Bean April 10, 2013 - 9:48 am

I was totally having this same conversation with my husband recently. It seems like a great plan, so I keep thinking there is a catch I’m missing.

After Elizabeth’s comment, it sounds like it really does work out in practice!

Elizabeth April 10, 2013 - 9:02 am

We did this, although it wasn’t our original intention. We’ve been putting money into Roth IRA’s for about 10 years, sometimes more, sometimes less, sometimes not at all when life got expensive (thanks, daycare!). But it had built up to a decent size and we had no intention of using it until retirement.

But when we moved to a new city, our old house sale took a little longer than we expected and we found a great new house and wanted to jump on it, but the down payment was tied up in the old house. We ended up taking about 25K out of our IRA’s to boost our down payment and once the old house was sold, we replaced most of the IRA money.

There’s a loophole that if you withdraw and then replace the contributions within 90 days, it’s like it never happened. Of course, we only used our own contributions to keep it simple tax-wise, anyway, but it ended up being a good little trick.

uday November 20, 2013 - 1:26 pm

Great move, Elizabeth! Great move with Roth IRA.

Budget and the Beach April 10, 2013 - 8:36 am

This is something I want to know about too!


Leave a Comment