Imagine…
You’ve got a checking account where all of your money goes. You want to start saving for the future, so you decide to take $200 out of your monthly income and put it in a long-term investment account (Roth IRA).
You set everything set up so that the $200 automatically gets moved from your checking account to your Roth IRA every month, and after a few months you forget about it. You don’t even miss that $200 a month anymore.
“Would I really forget about it?”
Yes, yes you would.
Fast forward 5 years…
You’re living it up. You got 2 promotions in the last few years so you decided to buy a condo, take a beach trip, and get 2 cats and a dog – Thelma, Boots, and Tinkle.
One day you’re at happy hour after a long week of work and Thelma & Boots decide they want to play in the sink. Naturally, Tinkle wants to play too.
Tinkle leaps into the sink, startling the cats who freak out and immediately scratch him, which of course causes Tinkle to lose his mind. While he’s freaking out, he breaks the faucet and water starts shooting out onto your nice hardwood floors.
You come home hours later to find the mess and $10,000 worth of water damage.
Don’t worry, all of the animals are ok.
What are you going to do?
Well, you decided to skimp on homeowners insurance because you wanted the extra money for your monthly happy hour….
Insert “I told you so” mom voice here.
You still have options.
You can use money from your Roth IRA, tax and penalty free.
Remember, you set up an automatic investment of $200/month into your Roth IRA starting 5 years ago.
- $200/ month x 12 months = $2,400/year.
- $2,400/ year x 5 years = $12,000.
$12,000 is your total contribution amount. It’s the amount you have physically deposited into your Roth IRA account.
You can withdraw your Roth IRA contributions at any time, for any reason, tax and penalty-free.
For real?
Yes, for real.
The good news:
You have up to $12,000 now to pay for the water damage and any other crazy life events that may happen due to Thelma, Boots, and Tinkle. Enjoy!
Takeaways:
- Roth IRAs give you more flexibility than any other long-term investment account to withdraw your money early. This is just one of the many reasons why I love them.
- Buy good renters/homeowners insurance. Just do it. You never know when your pets will freak out and cause $10,000 worth of water damage while you’re at happy hour. I recommend an open-perils policy.
- Only withdraw your Roth IRA money unless absolutely necessary.
- I know I just told you that it’s a great option if you need it, but early withdrawals should be a last resort. After all, this is a long term investment account. The longer you leave your money invested in the account, the more money you’ll have later. So only dip into this account unless it’s an emergency.
For more info check out Roth IRA: Best Way For Young Investors to Crush It
Disclaimer: I am not a certified financial advisor and this article is intended for educational purposes only