401(k) used as an emergency fund? | SummitDaily.com
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401(k) used as an emergency fund?

Dear Mr. Priest:

I read one of your

columns that talked



about emergency funds. I

calculate I need to set aside about $15,000 to $20,000 for emergencies.



I have a 401(k) plan through work that allows loans, and I have access to at least this much. Since I will tap into these funds only in case of an emergency, would it be appropriate to

consider that my emergency account?

Tyler

Breckenridge

Dear Tyler: Absolutely not! First of all, when was the last time you had an emergency that required you to have money 30 to 60 days from now? Would that really be considered an emergency? It is not unusual for it to take 30 to 60 days or more for the plan administrator of a 401(k) to process a loan request, so this might not be the best idea.

As you will recall from my column on emergency funds, this money needs to be liquid. This disqualifies loans from your 401(k) as a primary source. However, if you have a Roth IRA and such an emergency arises, you may be better off tapping into the principal from this account, provided you have enough money there.

The principal from a Roth IRA can be accessed without penalty and taxes, and if your Roth IRA is in mutual funds, you can usually have a check within three to five business days – and sometimes even more quickly.

However, if this is your only source for emergency funds, you might want to move the emergency portion in your Roth IRA into a very conservative investment.

The drawback to using your Roth as opposed to your 401(k) is you only have 60 days to return the money to the Roth if you want it to continue its tax-advantaged status.

With your 401(k), you should have five years to repay the loan. Although retirement accounts may be a source of emergency funds, they really are not the best source. Happy planning!

Bob Priest, MBA, CFP, is an independent certified financial planner and registered investment advisor serving clients locally and nationally. He can be reached at (877) BOB PRIEST or on his Web site at http://www.BobPriestFinancial.com. All opinions herein are those of the author and not of the Summit Daily News or its staff. Submit your financial questions to

Bob@FinancialCompanies.com.


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