The Do-It-All Roth IRA Part 2

Last week I broached the subject of using the Roth IRA as the primary savings vehicle for young people just starting their adult financial lives. It would be the place to deposit their emergency savings and to save up money for larger future purchases as well as the start of their retirement savings.

We left the article with a series of questions I want to address today. The first: Isn’t a Roth riskier than a bank account? After all, you know that things like emergency savings and money put aside for that car you’re going to buy in a few years probably shouldn’t be in the stock market. You want that money pretty safe and a bank is a pretty safe place. Roths invest in stocks and stuff…right?

Well, yes and no. You see a Roth, just like any other type of IRA is just an account (that’s what the “A” stands for). Depending where you open the account, you can put just about anything into it. So you could go down to your local bank or credit union and have them open you up a Roth savings account or open one and put a CD into it. You can make a Roth as risky or safe as you want.

The second question: what to do when the Roth gets full? You can put up to $5500 per year into a Roth IRA, so initially most young people won’t run out of room. Eventually, however, all of the savings they should be doing each year will go well past that. What then? You do exactly what you would have done if you had never heard of a Roth IRA. You’d open up a regular taxable account and put your new savings money in there instead.

That brings us to the last question: How does the emergency, car, and other savings in the Roth turn into retirement savings? This will seem a little complicated at first, but it’s actually quite simple. Imagine that somewhere along the way you figure you should have about $20,000 saved up for a car, $10,000 for emergencies, and $10,000 for retirement. You look into the only savings account you have, your Roth, and see that there is $15,000 in it. In that case you really have $10,000 for emergencies, $5,000 for a car and $0 for retirement.

As your savings grows, you will catch up on more and more of your goals. Once you save enough to max out your Roth AND add to your regular savings, you can allocate the money accordingly. For simplicity, let’s keep the above goals. You find yourself with a Roth worth $20,000 and a regular savings account with $15,000 in it: Your emergency fund of $10,000 and $5,000 toward your new car is now in your regular savings account, leaving $15,000 to finish up the car savings and $5,000 to start your retirement with in your Roth.

Across time, you will no longer put non-retirement savings in the Roth IRA. And that money can be invested a lot less conservatively than the money you need to keep safe for upcoming necessities like a new car.

This article was published in the Wichita Falls Times Record News on January 12, 2014.