Is Suze Orman Right? Use A Roth IRA as a Backup Emergency Fund: Can You Really Have Your Cake and Eat It Too?

Is it possible to have your cake and eat it too? Financial expert Suze Orman believes it’s possible to have both emergency funds and retirement savings.

Orman and her partner KT discussed using a Roth IRA as an emergency fund in a recent podcast episode. While it might sound unconventional, there are some interesting advantages to consider, along with a few key things to keep in mind.

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Suze poses a challenge with a question: "Is there a significant disadvantage to using contributions to a Roth IRA as a one-year emergency fund versus a high-yield savings account?"

KT jumps in with a quick answer, preferring the Roth IRA. Their reasoning? You wouldn’t want to break into a high-yield savings account, which Suze clarifies isn’t the main concern. There is a significant advantage to using a Roth IRA. Suze even adds with a playful jab, "No, no, that’s not the reason. Wrong answer again."

Suze Explains the Roth IRA Advantage:

Suze explains the key benefit: any money you initially contribute to a Roth IRA can be withdrawn without penalty or taxes. That means you can access your contributions if needed for an emergency. Here, Suze explains clearly: "Any money that you originally put into a Roth, you can withdraw without any taxes or penalties whatsoever." Even better, you can invest that money within the Roth IRA using a high-yield savings account or a money market fund, essentially creating your emergency fund within the Roth itself.

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There are a couple of catches to remember. First, any interest earned within the Roth IRA cannot be withdrawn tax-free unless you’ve had the account for at least five years and are over 59 and a half years old. Second, Suze advises against using certificates of deposit (CDs) within the Roth IRA for emergencies because of the usual 3-6 months penalty for early withdrawal. Suze emphasizes this: "What you would never want to do … invest in a certificate of deposit if you are using the Roth as your emergency fund."

Suze acknowledges a possible workaround: the CD ladder strategy. This involves strategically using CDs with different maturity dates. If you have a separate emergency fund established, you could set up a CD ladder within the Roth IRA with staggered maturity dates. This way, some funds would be accessible each month, providing a safety net. 

Orman VS. The Standard Approach

Suze Orman suggests a Roth IRA with a high-yield savings account for emergencies, but this advice is not the norm. Other experts usually recommend maintaining a separate emergency fund equal to 3-6 months of living expenses in a highly liquid account such as savings or money market, for easy access. While a Roth IRA lets you withdraw contributions penalty-free, it limits accessing earnings crucial during emergencies.

As with any financial strategy, it’s important to carefully weigh the pros and cons and consider your individual circumstances. Consulting a financial advisor can offer personalized guidance to ensure your financial decisions align with your long-term goals.

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