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That is right… I am proposing raiding your emergency savings to fund your 2007 Roth IRA if you have not fully funded last year’s contribution. The deadline to fund your 2007 Roth IRA is approaching — April 15th 2008. If you miss that deadline you can never fund your Roth IRA for 2007. The limit is $4,000 for 2007 and of course you must be within the income limits.

Reduce your risk

Withdraw some of your emergency savings if you must to fully fund your Roth. However, I strongly advise investing the money in a low volatility option until the emergency savings are replaced. Low volatility options would include the left-hand side of this scale of investments at Vanguard (VMMXX, VFSTX, VBMFX). Low volatility investments will ensure that you keep more of your money in a downward trending market in case you must withdraw the money in case of an emergency.

Why it works

This is an acceptable strategy because you can withdraw your Roth IRA funds without penalty up to the amount you invested and so the account can be used for emergencies. If you mis the deadline, you will miss your chance to invest in the 2007 Roth IRA forever. After you have replaced your emergency funds in your traditional savings account, move your Roth IRA money into a long-term investment such as a low-cost total stock market index fund.

I have personally used this strategy to fund my Roth IRA before the deadline. I still had enough savings outside of my Roth IRA (more than six months salary), so I invested the money pulled from my emergency fund directly into the total stock market index (VTSMX) rather than a less volatile option.

Technorati Tags: roth ira, emergency fund, vanguard, retirement

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