Retirement Planning/Roth IRA for Rainy Day Money

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QUESTION: Hello:  I am 62 years old, and have both a Roth and a standard IRA. I have made a few witdrawals from both.  My question is whether it would make sense to move our liquid, rainy-day fund money into Roth IRA, rather than leaving it parked in a money market fund.  If I put the money into the Roth IRA, then find myself needing to withdraw some or all of that money, is that possible without a penalty? Even if I put the money in a short term bond fund, it would earn a small amount, and would still be accessible within a day or two.  Your thoughts would be appreciated.  Thanks.

ANSWER: Hi Dennis,
You didn't state whether you were still working or not but you will need "earned income" to contribute to a Roth. So if you are retired and living off your savings, pension etc, you would not be able to contribute. If you do have earned income it would have to at least be the amount of the contribution. I understand your predicament and it is so hard to find a safe liquid place for your funds where you could earn anything other that a paltry interest rate. You could withdraw your contributions from a Roth penalty free but you would have to wait 5 years to withdrawal any earnings. The real problem with your idea is that you would have to pay sales fees (either up front or on the back end) if you put the money into any type of fund. So you could actually lose money on a withdrawal. I hope this helps. Let me know if you have any more questions.

Dave

---------- FOLLOW-UP ----------

QUESTION: Dave:  Thanks for the quick and informative reply.  I am no longer working, but I do have a small internet business of my own.  Would either the gross revenue or the net profit income on my federal return qualify me to contribute to the Roth?  If my idea is not workable, do you know of any options that might pay a point or two?  Thanks, Dennis

Answer
Dennis, the earned income for Roth contributions is based on your Modified Adjusted Gross Income. The problem with trying to find something that pays a decent fixed rate is that there is always going to be a "catch" such as surrender charges with an annuity, taxation at some level, or sales and management fees or lack of liquidity. This is the reason the stock market is so high right now. There's no safe haven. A highly over funded life insurance policy is a solution but may not make sense at your age because of the higher cost of insurance. You could look into tax free municipal bonds. They will pay more than a bank and do have liquidity.

Dave

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David M Iannopollo

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I am a professional financial advisor who can assist you with answers on mutual funds, annuities, IRA's, rollovers, qualified and non-qualified retirement plans, retirement planning, educational planning, life, disability and LTC insurances. I can also show you how to take advantage of the stock market gains without the risk of loss!

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