Using EF to make Roth contributions?

[jodi]

Anyone care to give any feedback? I have already taken $2k from my EF to go toward DH's Roth IRA contribution for 2007 (I've already contributed the max to mine). My EF balance right now is $4k. I keep going back and forth on whether to take another $2k out to finish out 2007's contributions.

Here's my pros:
We would still have $2k left in the EF. We both work in union protected jobs, so have a relative amount of job security. We have no housing costs.
We have not had to take any money out of the EF for about 6 months, since DH returned to work after getting his degree. When we did have to touch it in the past, it was for school-related costs, which we no longer have.
We both have good medical insurance, so the most we usually have to pay is $18 per visit.
If I don't make the contribution soon for 2007, I will lose the chance forever.
We can start to put more money into the EF in about 2-3 months.
Based on our anticipated expenses for the next two months, it is highly unlikely that we will be able to scrape together $2k before April if we don't take it from the EF.
If I can make the full contribution before April, I can claim the full amount on my taxes and get more money back (retirement savings credit) - that money can go immediately back into the EF (about $600).
It's a good time to invest right now.

The cons:
We've had a couple of high cost items/repairs lately, and may have more repairs to come on both of our cars.
We have a cc balance of $850 right now, which might be tough to pay off within a month.
It will only leave us with $2k in the EF! We could still face a major medical problem, disability, etc. Oh yeah, there's a chance I might be pregnant (shhh...don't want to jinx this one just yet).

I think I might have convinced myself to do it...or at least take another $1k out and scrape together the rest. Maybe...any thoughts or big points I'm missing?

[Seeker]

Anyone care to give any feedback? I have already taken $2k from my EF to go toward DH's Roth IRA contribution for 2007 (I've already contributed the max to mine). My EF balance right now is $4k. I keep going back and forth on whether to take another $2k out to finish out 2007's contributions.

Here's my pros:
We would still have $2k left in the EF. We both work in union protected jobs, so have a relative amount of job security. We have no housing costs.
We have not had to take any money out of the EF for about 6 months, since DH returned to work after getting his degree. When we did have to touch it in the past, it was for school-related costs, which we no longer have.
We both have good medical insurance, so the most we usually have to pay is $18 per visit.
If I don't make the contribution soon for 2007, I will lose the chance forever.
We can start to put more money into the EF in about 2-3 months.
Based on our anticipated expenses for the next two months, it is highly unlikely that we will be able to scrape together $2k before April if we don't take it from the EF.
If I can make the full contribution before April, I can claim the full amount on my taxes and get more money back (retirement savings credit) - that money can go immediately back into the EF (about $600).
It's a good time to invest right now.

The cons:
We've had a couple of high cost items/repairs lately, and may have more repairs to come on both of our cars.
We have a cc balance of $850 right now, which might be tough to pay off within a month.
It will only leave us with $2k in the EF! We could still face a major medical problem, disability, etc. Oh yeah, there's a chance I might be pregnant (shhh...don't want to jinx this one just yet).

I think I might have convinced myself to do it...or at least take another $1k out and scrape together the rest. Maybe...any thoughts or big points I'm missing?

One question: If you take 2K out of the EF now, how long will it take you to put the money back in?

That I think, would give you an answer.

[Seeker]

Adding to thsi....

You have not really listed monthly expenses... that really determines how much you should keep in an EF.

If you are pregnant, then you may want to be saving more than the normal EF.

You have already taken 2k out of your EF, and you have 4k left.... how long will that last with current monthly expenses?

While I understand that you will be able to get back $600 from tax refund... it does not put you in a very good situation if you cannot pay back into the EF before the end of the year (especially with the potential of a baby at that time, & you on disability).

[maat55]

If your using it to fund a roth ira, you will get no tax deduction. There 's no law that say's you have to fully fund your ira. EF's have a purpose, ira's are not emergencies. Good news is, that if you have a emergency and your EF is in your roth, it will only cost you 10% to get it back.

[cptacek]

If your using it to fund a roth ira, you will get no tax deduction. There 's no law that say's you have to fully fund your ira. EF's have a purpose, ira's are not emergencies. Good news is, that if you have a emergency and your EF is in your roth, it will only cost you 10% to get it back.

Wrong. If the money is in a Roth, you can withdraw what you put in at any time with no penalty.

[Broken Arrow]

Er, unless I am mistaken, you can withdraw your contributions at anytime, but the earnings are subject 10% early withdraw penalty if you try to pull them out before you are 59.5 years old.

There are a few exceptions where the earnings can also be withdrawn penalty-free, such as paying for a house down payment. However, I think there is a limit to that as well, 10k for houses if memory serves.

Anyway, I recommend to look up the specifics of the plan before you make a move.

[maat55]

The money you take out has to have been in there 5 years or more and I think you have only 6 months to put it back. I just read a Suzie Ormans book that said this. I will double check it to make sure. Either way, the investment will not give you a tax deduction.

[prosper]

The money you take out has to have been in there 5 years or more and I think you have only 6 months to put it back. I just read a Suzie Ormans book that said this. I will double check it to make sure. Either way, the investment will not give you a tax deduction.

You can withdraw the earnings penalty free if you are 59.5 and the the roth has been open for at least 5 years.

You can withdraw your actual contributions at anytime .

[jodi]

From the IRS web site:
Topic 610 - Retirement Savings Contributions Credit

If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA), you may be able to take a tax credit. The amount of the saver's credit you can get is based on the contributions you make and your credit rate. Refer to Chapter 4, Retirement Savings Contributions Credit, in Publication 590, Individual Retirement Arrangements (IRAs), for more information. Your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate; your credit rate also depends on your filing status. These two factors will determine the maximum credit you may be allowed to take


It's a credit, not a deduction. I did just double-check the amounts, though, and we are already getting the maximum back since I contributed $4000. That takes the credit out of the picture as a contributing factor to the decision.
As far as set expenses, we don't have many. They are as follows:
student loan #1: $100
student loan #2: $186
payment to my parents (with whom we live) for utilities: $200
cell phones (2): $75
groceries: $200
gas/car maintenance: $250
bowling league + babysitting: $160
Total: $1171

Total income: $1230 every two weeks = $2460
Discretionary income: $1289

Outstanding debt: $850 - Discover
$500 - Lowe's (no interest or payments until July - no rush to pay this off)
No car payments. Medical and auto insurance are deducted from my paycheck (take-home pay reflected above).

The reason we haven't been able to make this contribution yet has been a rash of expensive problems (car, cat surgery, annual dues that drained us last month). I don't anticipate any more big expenses...but then again, I didn't anticipate any of the prior ones - that's why they're called emergencies!
I would think that we would be able to replace the EF in 5-6 months.

[anonymous_saver]

Since you still live at home and have debt, I would use some of that emergency fund to pay off that debt instead. Pay off the $850 Discover now, and set aside $500 for the Lowe's payment in July... and never use your cards again unless it really is a huge emergency.

What are the 2 student loan interest rates at? Pay off the highest interest one first (as long as there are no pre-payment policies).

Wait a second, you have $1289 of discretionary money each month?!? If this is the case stop spending money on "discretionaries" for a few months and pay off all of your debt as soon as possible. If this $1,289 amount is really accurate, you could easily use that to put the rest of the $2,000 in the Roth IRA for 2007 before April. Perhaps I am understanding this wrong?

Do you have plans to move out of your parents' home? It sounds like you have a kid (or kids) already, which is a huge case to have a good sized emergency fund.

Look forward to seeing what you post...

[disneysteve]

I appreciate the thinking that you only have one shot to make your 2007 contribution and once April 15 is past, that's it. However, reading your blog entry, it sounds like it might not be such a great idea. You've got credit card debt (even at 0% it is still debt) that you need to get rid of, student loan debt, some medical bills, possibly some car repairs, and to top it all off, you might be pregnant. All of this in a economy that is on a serious downturn.

I think you need to be cutting spending, paying off debt and building cash reserves. A $2,000 EF won't last long if you are pregnant and need to be out of work for any period of time. A $2,000 EF won't last long if you can spend $600 for medical care for your cat. A $2,000 EF won't last long if you need any significant car repairs. And your expenses will increase significantly when a baby comes along.

[jIM_Ohio]

I don't see the EF as being needed to be funded in full as cash if you have high disposable income ($1200/month is quite high).

So put 4k into Roth, then put 4k back into EF over next 8 months. over same 8 months, put $500 into Roths for 2008.

A go forward suggestion- put $500/month into Roth. In Nove and Dec, you will have $1000 extra cash because you will have Roth capped for the year. Use this to refund the EF or do something similar.

[disneysteve]

you have $1289 of discretionary money each month

high disposable income ($1200/month is quite high).

Sorry if I missed this but can someone please show me where she says they have $1,200/month free. Thanks.

[anonymous_saver]

Total income: $1230 every two weeks = $2460
Discretionary income: $1289

Here it is.

[jodi]

Oops, forgot daycare expenses - $57/wk = $228/mo. I knew I was missing something.
$1061 discretionary income.
As far as the cc goes, I use it every month and pay it off every month - usually $200-300 for groceries and gas. It's higher than usual right now because I have the cat's surgery on it. Still, The bulk of it is not going to be due until March 31. I have to pay $250 off by the end of February, then everything else is on next month's cycle. It won't be a problem to pay it off.

As far as the Lowe's card, I've knocked over $1500 off the balance since July (bathroom remodel). I'm not concerned about paying that off either, since I have 5 more months.

Maybe I need to break this down to see the big picture.
Money in checking: $200
Check to be cashed: $640
Total available money right now: $840
With this, I am going to make student loan payment #2 ($200) = $640
(the money for student loan #1 is already set aside in savings, where it is direct debited)
I also want to make a payment to my mom for Feb. utilities ($200) = $440
Let's figure groceries ($50) until next paycheck = $390
I also have to make a semiannual rent payment on my real estate key ($92) = $298
Two weeks of day care ($108) = $190
That's as far as I like to take my balance down between pay periods.

Next pay period - 2/14 rec. $590
2/15 rec. $640
Balance of $190 + $590 + $640 = $1420
If I can spare $500 to the Roth, that will leave me with $920.
I can pay down the Discover card by $400 = $520
Cell phone payments ($75) = $345
Day care/entertainment for two weeks ($188) = $157

That's going to be tight after gas/groceries - might have to scale back on the cc payment or the Roth, or wait until the second pay period of the month for one or the other.
If I can do another $500 in March, which seems plausible, then I will only be $1000 short by April, which I can then take out of EF if the cc is paid off, or just forgo the contribution and start on 2008.

I feel a little better having a plan - before I put this down on paper, I didn't think there was any way I could do it without touching the EF. It sounds like I have a lot of discretionary income, but it all goes to debt repayment or our Roths. We've managed to pay off $5k tuition, several thousand in student loans, and a car two years early in the past two years, while maintaining our maximum Roth contributions (and not paying one penny of cc interest). It might sound like we have a lot of debt, but it's basically all student loans at 3.75% and 4.6%. I know some would advocate paying them off before investing, but I'm comfortable with having a balance at those interest rates while investing in a down market.