Just a 47-year-old mom of 2 in Northern California. My kids are Monkey Monkey(MM) and Drama Llama (DL). I am married to Monkey Hubby (MH). I am not a big risk taker. But I guess one thing I have learned lately is how taking very small financial risks can pay off. I don't even know if "risk" is the right word. Maybe just stepping out of my comfort zone.
I really thought long and hard before I jumped in and did the credit card balance transfers. To earn interest. It was hard for me to get past the idea that this was "risky." Though I knew in my heart it wasn't terribly risky.
Anyway, so I have been doing the same thing with this emergency fund/ROTH thing. Something has been holding me back.
I know ideally that now that we have a decent cash efund, that if we were able to add to it, that I would just do so in a ROTH.
But I wasn't really willing to commit the initial cash funds - any of them to a ROTH.
Anyway, for whatever reason I was thinking long and hard about it today. & was thinking of diverting our next $5k cash into a ROTH.
Of course I discussed it with dh and he is devil's advocate. If this is o great, why don't we just move the $7k or so to max out '07? Why don't we just do it now?
So we talked long and hard about it and I think he has a point. What is holding me back?
Anyway, so no firm decision yet, but I think we are going to max out our 2007 IRAs with cash.
I wouldn't advocate this (like balance transfer interest) to most people. But here are the reasons it makes sense for us.
1. This is $7k that we would not put into our retirement otherwise. Our retirement was up almost $20k last year (contributions) so we made it a point to build cash instead. We made a conscious decision not to fund our ROTHs. This would put our contributions to more like $25k for 2007. Obviously more than we need to contribute.
2. Our emergency fund is for EXTREME emergencies. We figure the odds are rather good (we would hope) that we would never touch that money.
3. We would still have a good $5k cash emergency fund in taxable accounts, on hand. (Of the "untouchable" variety).
4. We would still have other cash on hand.
5. Back to #1. If we got some major windfall tomorrow. All we do is shift the cash in our ROTHs to stocks and we can save the cash outside the ROTH then. So it just gives us more flexibility.
6. Back to #3 & #4. It doesn't really matter if it took some time to pull cash from our ROTHS, in extreme emergency. We have lots of other options in the interim. & plenty of more short-term cash for more immediate cash emergencies. This is why we were quite happy with 3 months living expenses in cash to begin with (6 seemed overkill for us).
7. I keep a sharp eye on the tax law so I will know if things change. For now there is no penalty or tax to pull out cash that I put into my ROTH. But I know this can change any time.
At worst, at some point we'll have to pull out money we never intended to put into retirement in the first place.
At best, we don't need it, we build up more emergency cash, and eventually we convert all our ROTH cash to stocks. To grow tax-free forever. Or we keep it as extra cash for peace of mind to grow tax free forever. Either way doesn't sound so bad.
Am I missing anything?
Well, I am still pondering. But I think dh had a point. What is holding me back? Just the general concept that you don't mix retirement and emergency funds.
Sometimes it makes more financial sense to step outside of your comfort zone a little bit.
I learned that lesson with the balance transfers, and am willing to try again.
I can't see doing balance transfers forever (or even beyond 2008). I can't see using my ROTH as part emergency fund forever. But tighter times call for more creative measures. 
P.S. Since there is always mass confusion on this topic...
"Distributions from a Roth IRA are qualified and thus tax free if they are made after the five (5) year holding period AND for any of the following reasons:
**you are 59½ or older;
**your are disabled;
**you use the distribution to pay for up to $10,000 of qualifying first time home buyer expenses; or
**your are the beneficiary receiving distributions following the death of the Roth IRA account owner.
Regardless of the five (5) year tax rule if Roth IRA distributions do not exceed contributions they are not taxable."
Taking Risks...
January 8th, 2008 at 06:01 pm
January 8th, 2008 at 07:06 pm 1199819187
And in a way, there is something wrong, and you've caught it: Retirement and Emergency Funding should not mix!
They are two different entities designed with two different purposes in mind. One is money you'll be relying on when you retire one day. The other is money standing by in case of an emergency. One needs to be fairly liquid, at the ready. The other should be dormant, fattening itself up as much as possible.
My current setup (and this is subject to change
That's just my opinion anyway.
January 9th, 2008 at 03:05 am 1199847922
I probably agree with you because I am doing almost the same thing.
January 9th, 2008 at 03:32 am 1199849528
I think if it was somebody else, I might have reservations, but this is Monkey Mama, and being a financial whiz, I think she can more than keep her money straight....
January 9th, 2008 at 02:39 pm 1199889542
The HSA wouldn't make sense because we couldn't pull it out in emergency. Only for healthcare. So then we just tie up too much cash where we can't get at if I lost my job or something.
I was wondering if there was anything else I was missing. I am surprised I didn't have more comments either. (Thought it would spark quite a debate.
But mostly BA, I have to disagree with you. Why shouldn't they mix? I think it was good to talk to my dh, the devil's advocate. BEcause he made me realize that I had to get over the "label." Who cares if it is a retirement fund if I put in some cash and money that I never would have put in their otherwise? & I can access it and use it? I just am not sure it matters. In fact, I think this is a very smart financial move for the long run. Because it means odds are I will put in $7k (& odds are I won't touch it) that I wouldn't have otherwise. What is $7k in 40 years? A lot!
It probably helps to share my biggest regret from my 20s is not maxing out my retirement and saving our money better. If wqe maxed out our 401k (when we were saving a huge chunk of income anyway) we could have been a good $4k richer today - taxes saved. So I am trying to think outside the box a little more and use this stuff to our advantage. This is a perfect example. I can tax shelter $8k without feeling less financially secure or more cash poor.
BUT I have come up with another conundrum. I hadn't decided if I should put it in FDIC insured cash or in money market mutual funds with our other ROTHs. Anyway, I was surprised to find only one of our banks offers IRAs. Of course the local one without the high interest rates. & so leaves us with the decision between very low interest FDIC insured cash or money market mutual funds. Non-FDIC insured & which have been all over the news (the sky is falling).
I am considering U.S. Treausry money market mutual funds as an alternative. The interest rates are good and it is so much easier than opening new accounts at our bank. But still pondering. I think this is the real problem with the plan. So I have more thinking to do.
But obviously after sleeping on it I feel much more confident about this. I do appreciate the input.
January 9th, 2008 at 04:49 pm 1199897377
However, when I wrote that, I forgot that you are not an ordinary person.
January 9th, 2008 at 10:46 pm 1199918801
I actually updated my NEt Worth schedule. I now have a separate line for "ROTH -efund."
Just not thinking about it like retirement money and not counting it in my overall retirement balance. Which is key here.
I realized the other plus is my dh is less likely to spend it on a TV or something, if most our cash is in the ROTH. LOL.