Question about withdrawal for reasons other than medical or college ex

[Guest]

I am just learning about Roth IRAs and have a couple of questions. My husband and I both work, have no children and earn under $160,000 per year. We are both 30, so it will be quite a while before we retire. I heard that withdrawals can be made from a Roth for any reason at any time without being taxed. For example, if one of us were to become temporarily disabled or I stopped working, could the Roth be used as "temporary" supplemental income?

[Guest BrianfromWash]

As far as I understand, you can make a penalty-free withdrawal from your IRA provided the amount you withdrew is returned within a certain period (I believe it's 60 days). There's a lot of other hokum that goes along with making this kind of withdrawal in order not to incur penalty. You'll want to consult someone knowledgeable on this (and there are plenty of those here on the board) on this, as I am not absolutely certain what I've told you is correct in any capacity.

[John G]

There are multiple options for pulling money out of a Roth depending upon the timing and on what you will spend the money. But setting that aside, I am concerned by what you imply in your post. Since both of you are working, young and without kids you should be building an emergency fund that is invested in short term paper or money market funds. This should be not used for wish list items like a splurge vacation, but should be your reserves.

Do this, and you will not be tempted to tap into your Roth so readily. A Roth is a tax shelter. It works best when you put money into it and have the discipline to keep it there. There are a zillion posts on this site about how can I get at my Roth. That is upsidedown and insideout thinking. You should want to put money in, not be thinking of ways to take it out.

The 60 day rule was written to allow folks some time to get funds from one custodian to another. This could operate as a "bridge loan" if you knew the period was short, but failure to replace the funds can be devastating. Also note, you will have to replace the mandatory tax witholding even though you do not have access to those funds. Conclusion: more headache and potential downside, best to ignor this option.

"If I stop working" sounds like you may be considering starting a family. If you can live on your spouses income alone, you may find this change a breeze. But if you are spending 90% or more of what you both make, then you will be in for a shock as you will need to radically readjust your budget. Been there 18 years ago... VCR and popcorn starts looking good compared to a night on the town.

Good luck.

[Guest BrianfromWash]

John made a good point I din't even think of. Start building cash reserves. I have both a savings account (for dire need and a long term savings vehicle) and a money market account (for short term savings items and extra cash if I need it). Through my particular abnk, I'm able to have automatic withdrawals on my checking account at no charge, so I don't even have to think about it (I just have to be sure the money is there). That's the best insurance for emergencies.

[Guest]

Thank you, John G, for the reply.

We do have some funds in a savings account but I never thought of putting it into a money market account. It sounds as if it would be a good place to put a couple months worth of income as I imagine the interest is probably better than that of our credit union savings account. I read an article about the Roth in a magazine and was under the impression money could be "easily" withdrawn. I am now realizing that I need to focus, as you mention, on our reserves. I am new to this site and look forward to learning some useful tips. Thanks again.

[John G]

There are rules for withdrawing funds from a Roth for special purposes such as a first time home purchase or education.... but these types of withdrawals erode the value of the tax shelter. Just because you technically can do something does not mean it is a wise option.

I would suggest that you subscribe to Kiplinger Finance mag (<$10/yr) which will give you a good overview of investing and tax issues.

Even if you are building your reserves, you may still want to put some funds into a Roth. The $2000/yr is the current maximum, you can initially fund your Roth at a lower level. Something you may find attractive is to set up a monthly automatic withdrawal from a checking account to "dollar cost avg" into a Roth.