Roth IRA As An Emergency Fund

Miller

June 8th, 2006 at 7:45 pm

This is exactly what makes it better than a 401k-type plan (after company-matching, of course). One good strategy might be to actually use it as a non-retirement vehicle. Invest all your true, intended retirement money in a 401k. Then load up a Roth. It will grow tax free, and you can dip into it for, say a down payment. Of course, you can’t get the growth out until you retire without penalty, so you can’t count on the growth for your down payment (or whatever you choose), but you are still maximizing that growth for when you can use it.

E. Uriel Acevedo

June 9th, 2006 at 7:03 pm

I know what I am about to say will sound like heresy in the churches of “Conventional Financial Planning” but here it goes…

STOP wasting your precious HARD EARNED MONEY contributing to government sponsored tax-deferred qualified retirement plans.

With the EXCEPTION of any monies being matched by an employer- you should STOP putting money into your IRA’s, 401k’s ,403b’s and any other “government” tax-sheltered retirement plans!

In order to understand why NOT to contribute to these ATROCIOUS Government Tax-Shelters you must first analyze…Why they are used in the first place?

1) Faulty Premise #1: “I’ll save on taxes…”

Remember that you are NOT savings on taxes you are simply DEFERRING taxes.

So the option is to pay now or pay later (more on this below in Faulty premise #2), however, if you decide to “pay later” you will not only be in for a big surprise at retirement, you will also have now Lost Access to YOUR Capital throughout your income producing years! (a time in which you will no doubt have the GREAT capital needs for items such as: cars, college educations, weddings, homes etc.).

2) Faulty Premise #2: “My taxes will be lower in retirement…”

Putting aside the fact that this premise requires that you Actually PLAN on making LESS money in Retirement in order to be in a lower tax bracket (UNBELIVABLE!), let us consider the following:

a) Dig up your income taxes for the last 10,15 or 20 years- are you now really paying less taxes than you were back then? Do you think that you are paying more taxes now simply because you are making more money or is it because taxes have gone up? – I’ll let you be the judge…

b) DO you REALLY think that taxes will be going down in the years to come?- can you say: Trillion dollar budget deficits, Social Security and Medicare deficits…

c) REQUIRED MINIMUN DISTRIBUTIONS are mandatory on all of your “tax-deferred” accounts starting at age 71 1/2. Failure to do so will result in a 50% penalty on your accounts. Imagine that- not only will you be required to take distributions that have the potential of bumping you into the next tax bracket , hence MORE taxes, if you fail to do so you will be penalized 50%!!

The Center for Policy Analysis says “…peculiar methods employed to tax social security benefits imposes some of the highest and most destructive marginal tax rates in the entire tax code.”

3) Faulty premise # 3: “I need to INVEST in my Retirement…”

Let me point out a line that has been blurred by conventional financial planning and requires clarification: Investing is NOT the same as Saving.

Investing entails exposing capital to a certain degree of risk in hopes of a favorable outcome while Saving is simply the accumulation of capital.

Most of the financial woes that we encounter during our lifetime are inherently associated with the LACK of SAVINGS. We have been conditioned to believe that whenever we have a MAJOR capital need the best thing is to borrow “other peoples money”, and so we spend our ENTIRE lives paying interest and finance charges (not to mention taxes) without giving it a second thought. We are quite simply: UNDERCAPITALIZED.

How do you know if your undercapitalized? Very simple. Is your house mortgaged to the bank?, are you paying a car loan or lease? Do you have credit card debt? Do you owe any medical bills? - If you answered yes to ANY of these it means you are undercapitalized!

YOUR sole focus should be on Saving money NOT Investing.

Not convinced?- How much money did your 401k, IRA etc. earn during the last 10 years? Now add all of the interest you paid-out during the last 10 years, include your mortgage, car loans, credit cards, leases. Which of the two numbers were greater?

If someone gave you the option- would rather have the money you spent in interest (never to see again) over the last 10 years or the money you earned on your 401k, IRA etc- which option would you choose?

4) Faulty premise #4: “My Roth IRA as an emergency fund…”

You might think that a Roth beats all of the above. Not quite.

Using your Roth as an emergency fund not only ignores the fact that you are limited by the amount of money that you could contribute to that “emergency fund”- it also ignores the fact that the growth within your “emergency fund” cannot be accessed without penalty before age 59 ½ and finally it also fails to address the fact that you cannot Pay-back the money you accessed from your emergency accounts.

If the account is to be earmarked as an emergency fund then one must then assume that it would have to sit in a FIXED and GUARANTEED account- such as a savings account- otherwise it could not serve as an “emergency account”. It wouldn’t be much of an emergency account if at the time you needed the money- it had lost some or all of it’s value.

Therefore there is ABSOLUTELY NO advantage to “tying-up” money in a IRA as an emergency fund. NO advantage WHATSOEVER.

» This Week in Blogs » Consumerism Commentary: A Blog About Personal Finance

June 9th, 2006 at 8:05 pm

[...] Blueprint for Financial Prosperity looks at using a Roth IRA as an emergency fund. Note that if you withdraw any part of your contribution, you can re-contribute that portion later on in the year. [...]

The Paranoid Brain » Should You Save into a 401(k)? - Personal Finance and Investing Advice

June 10th, 2006 at 6:35 am

[...] I had always assumed that the advice about saving as much money as you could into your 401(k) plan was uncontroversial. I was reading Blueprint for Financial Prosperity’s suggestion to use a Roth IRA as an emergency fund. The idea is that you can withdraw contributions from this year without penalty; it counts as if you made no contribution. Thus you can safely make contributions to your Roth IRA instead of putting them into an emergency fund, at least for the year. [...]

Jerry Kindall

June 11th, 2006 at 3:26 am

E. Uriel is hawking a scheme that seems to involve borrowing money against life insurance policies you have bought. (These policies would, I presume, be what used to be called “whole life.”) The Bank On Yourself program is promoted TO INSURANCE AGENTS as a way for them to sell more insurance. I have no idea whether there’s anything to this plan or not, but E. Uriel is clearly not a disinterested party. Worse, to find out what he’s talking about he invites us to “visit his lens” (whatever that means — someone somewhere has probably confused “site” with “sight” again) which in turn leads you to another Web site. There’s a promotion code you’re supposed to enter there, which means you’re going to be sold something and if you buy, E. Uriel will get a kickback.

Tell you what, E. Uriel, why don’t you tell me your scheme up front. If I try it and it makes me more than I’d have otherwise, THEN I’ll give you a cut. That sounds pretty fair, doesn’t it?

fivecentnickel.com

June 11th, 2006 at 11:57 pm

Weekly Roundup - 06/09/06

Here’s a quick look at a few things from the MoneyBlogNetwork (and beyond) that caught my eye over the past week…

MightyBargainHunter asks if one should pay down their mortgage or sock extra savings away in their ING Direct account (click…

Jerry Kindall

June 13th, 2006 at 12:08 am

I’m glad to hear that there’s no selling involved in your site (or “lens” — I still have no idea what that’s supposed to mean), however I will dispute your claim that Bank On Yourself is not promoted as a tool to sell more insurance. Google for the term “Bank On Yourself” and the #2 result (for the very site your blog links to, findoutmorenow.com) has the following description: “Acquire more highly qualified prospects, sell more insurance, magnetically attract quality recruits, increase sales and productivity.” If you view the site’s source, you will find that that text comes from the META Description tag. META Keywords for the page begin “Selling Insurance, selling insurance, insurance prospecting, Insurance Prospecting, Prospects, prospects…”

You can perhaps see why I jumped to the conclusion that “Bank On Yourself” is about selling more insurance, when the site to which you’re directing people describes itself as information about how to sell more insurance. However, now that you have explained to me that I am uncivilized, rude, and jealous, I see that I was totally wrong!

All right, I’m being sarcastic. I will, however, apologize for opening by saying you were “hawking” a “scheme.” As I admitted in my original message, I don’t know whether there is actually anything to “Bank On Yourself” or not, and so I cannot logically support “scheme,” which does have negative connotations. (I meant it more in the sense in which it is used in computer programming, where it is completely value-neutral, but that’s a bit of jargon leaking over from my day job.) “Hawking” also has negative connotations I cannot quite support — as well as being the name of a brilliant scientist and a dope MC, of course.

In my defense, I will say that it is an immutable law of the universe that when someone claims that conventional wisdom is totally wrong, the vast majority of the time they are 1) completely full of BS and 2) trying to sell something.

Miller

June 13th, 2006 at 4:31 pm

E. Uriel wrote a lot, but I wanted to offer my opinion to the most fundamental things that I disagree with.

1) I’ll save on taxes.

You claim that one won’t. Well, first we need to agree on what we are comparing it to. I will admit I haven’t clicked your website link, so if there is something other than a basic savings account type thing you’d like to compare it to, I am unaware of it. With that said, let’s compare to a savings account. Safe place for your money, right?

I don’t understand how you say you don’t save on money here. In a savings account you pay your income tax (same as a Roth), then you pay money on the interest every year (that’s a 25%+ knock off your return EACH YEAR). With an IRA, you don’t pay that annual tax. So, how, exactly, are you not saving in tax? The difference with the tax-deductible traditional IRA is neglible to the bottom line (IMO).

2) Taxes lower in retirement

Obviously this is debatable and depends on your personal life style, BUT…

In retirement, you (hopefully) are no longer paying a mortgage and you also aren’t saving for retirement anymore! Those are two VERY significant portions of most people’s budget. So, yes, you could very well be in a lower tax bracket. Obviously its not a certainty, but I wouldn’t WRITE IN ALL CAPS ABOUT HOW THATS A RIDICULOUS IDEA!!! =) just playing.

3) I need to invest in retirement

I agree with much of what you say here. However, I think you may have missed your audience with the people that normally read this blog. Let’s focus on your “Not Convinced” line. I 100% agree with your conclusion. But I think most the people here realize you put your money where the higher rate is. I don’t think anyone here would argue you should invetment in retirement instead of paying down your 17% credit card. What you are more likely to find here is people like me would invest in their retirement over paying off their 2.65% student loan or 2.9% car payment… or even (sadly not me) their 6% mortgage. Why? Because (not to sound condescending) obviously a 10% “average” S&P 500 index return is higher! I guess we can argue about market returns (and certainly the current market trend isn’t helping my point), but historically, that’s the market return. And remember, if you don’t buy/sell a lot (ie, buy index funds), you don’t even pay captial gains tax (for retirement funds, that point is moot). So, I agree with your “not convinced,” but I think you’ll find most people here have the greater of the two numbers being the earning, not the paid interest.

4) Roth as emergency fund

I don’t think you made a lot of new points here, just tied them together to the Roth. And yes, I agree with most your conclusions… which is why “emergency fund” is in quotes. Doing so would be unconventional and odd. Yes, you couldn’t access those earnings. But, if you believe (from the above) that retirement is worth “investing” in, this is a way to invest a little bit more in your future without locking the money out completely.

A final note, I do actually agree with much of what he has written — just not to the extreme. Many of my friends max out their 401k, where as I only go slightly over the company match maximum. Why? Because, yes, I think saving the money for a down payment might be more worthwhile. And then I also max out my Roth so that I can save for retirement but still have access to that money for a possible home…

Anyway, my two cents…

E. Uriel Acevedo

June 13th, 2006 at 10:34 pm

I’d like to address Mr. Miller’s last post as per the request of Jim.

Let me start out by sharing that I am sincerely impressed by the level of discussion and the topics addressed on this blog. It is quite fun to have such a forum to share and discuss these ideas.

1) Taxes…

Mr. Miller asks :”So, how, exactly, are you not saving in tax?” – if I understood correctly by his calculation one can save up to 25% in taxes each year by setting aside money in a “tax deferred” account rather than not.

Setting aside Mr. Miller’s tax calculation (I don’t know how he arrived at that 25% figure?) I think he misread my statement. My statement was as follows:

“…you are NOT savings on taxes you are simply DEFERRING taxes”

In other words, it might appear as if you are saving taxes now, however, the fact remains that you will be taxed on this money LATER when you take distributions from this money (as a matter of fact, even if you DIE, your money and it’s growth WILL BE TAXED- and in the case of an estate tax situation the total amount may be taxed upwards of 50%- imagine that!).

As it relates to the original topic posted my contention is that the restrictions inherent in qualified tax-deferred plans far out weigh any perceived short-term tax advantages.

2) Taxes lower in retirement…

Mr. Miller states: “In retirement, you (hopefully) are no longer paying a mortgage and you also aren’t saving for retirement anymore! Those are two VERY significant portions of most people’s budget.”

Setting aside his “light-hearted jab” at my use of CAPS…lol, I once again think that he misunderstood my statement.

Income taxes are not a result of budget (or expenses), they are levied on INCOME or in the case of retirees this would be on their distributions from their qualified accounts, pensions, social security, non-qualified accounts (investments or savings) and any other forms of passive income.

The fact that your expenses would be less in retirement has nothing to do with the degree to which your income will be taxed.

My observation was that of the defeatist mentality which assumes that the older we get the less income we should strive to make.

3) Missing the audience of this blog…
I am not sure how Mr. Miller knows the exact make-up of the people reading this blog, nevertheless if it is comprised primarily of individuals as he describes then these are EXACTLY the people who could benefit the most from these observations.

His premise is, that as him the people on this blog choose to INVEST their money for retirement (rather than pay-off debt and SAVE) because “obviously a 10% “average” S&P 500 index return is higher!” than the interest they are paying on their student loans, car payments and mortgages or any money they might earn in a fixed account.

His comment alludes to a very important and MAJOR misconception regarding investing in the stock market. Despite the fact that everyone claims to know that past performance is no guarantee of future performance, conventional wisdom is insistent on highlighting the fact that the market indexes always will outpace the return of guaranteed fixed investments. And so the BUY-HOLD strategy (index investing is a buy-hold strategy) was invented thus paving the way for the creation of financial instruments (such as mutual funds) and tax-deferred programs (such as 401k’s) to be pedaled to hard working people trying to do the right thing!

In order to truly understand this fallacy one must first examine its origin. If you look at a market chart for the past 102 years you will find that the market continuously has moved to new heights, however when you look closer at the graph you will notice that the market moves in secular cycles. A secular cycle is defined as periods of long positive returns followed by periods of long flat or downward turns.

When you look at these cycles you will notice that the great majority of time the market is actually doing NOTHING- it runs flat! Whether things will work out in the long run actually MAKES NO DIFFERENCE AT ALL if you are looking to retire or have a large capital need- such as an emergency, a need for a new car, a need to buy a home, a need to pay for a child’s education etc.

To further illustrate the point had you been in a BUY-HOLD situation, such as which you are almost forced to have within a 401k (due to its lack of investment options-i.e. usually limited to mutual funds), during the period between 1966 and 1982 or the period between 2000 and 2004, there is a good chance your portfolio gains would have been negligible.

I can assure you that you would have paid a lot more in interest over those years than you would have made in the market had you utilized a BUY-HOLD/INVEST in the Index strategy.

The reason is simple, because no matter how you spin it or how “little” the interest you are paying may seem; the fact remains that the INTEREST you PAY will be a constant and an inevitable consequence should you continue to choose to be undercapitalized.

And why are most people undercapitalized during their income producing years?
1) Because they either don’t save at all (I imagine that is not the case of the people on this blog)
2) Because they invest rather than save
3) Because they tie-up their money in IRA’, 401k’s and other qualified tax-deferred programs as well as other illiquid assets such as their home (but that’s another topic all together).

In closing please remember a 10% “average” rate of return is simply that- an AVERAGE, and it has NO meaning or relevance to YOUR financial future.

Random Skeptic

August 12th, 2006 at 3:58 pm

I found this website while searching the net for information about “Bank On Yourself(tm)”. As an entrepreneur with 2 companies, I am naturally curious.

Aren’t the radio commercials for findoutmorenow.com designed to get you to sign up to become an insurance agent? From what I’ve been able to ascertain, that must be the “catch”.

E. Uriel Acevedo

August 13th, 2006 at 9:31 pm

To Random Skeptic (and my apologies to all who have already read about this before):

Might I respectfully suggest in the future you take the time to read all previous posts prior to submitting a post?

The previous posts above should have been enough to clarify your confusion; however in view of your incomprehension here I go again…

Bank on Yourself(TM) is a financial strategy offered to the general public by way of our radio ads and other marketing venues.

It is ALSO offered to the Financial Planning/Insurance industry as an alternative planning system that may be incorporated into their practice.

Only HIGHLY trained and EXPERIENCED Financial Planners and Insurance agents qualify to become Bank on Yourself(TM) Certified Advisors. Most of our current advisors have more than 20 years of Professional Financial Planning experience and most possess advanced degrees such as CPF(TM), MBA, CPA, ChFC and CLU (myself being one of the rare exceptions to this fact- I only have 6 years experience in the industry).

The radio ads ARE MOST CERTAINLY NOT designed to get anyone to “become an insurance agent”. They are designed to bring to light one very simple fact being ignored by the entire Financial Planning industry, and that is: the LACK OF CAPITALIZATION is the crux to ALL financial disarray.

I would like to advise you to go to the website you were directed to in the radio ad you heard; and enter the pass code provided to you- this will allow you to download an INVALUABLE report outlining the concept (I PROMISE there will be no information advising you to become an insurance agent!).

For another detailed overview of this strategy, provided by a Infinite Banking/Bank on Yourself(TM) CLIENT you may visit the following link which is also available on my lens:

http://www.infinitebanking.info/IBC%20-%20How%20It%20Works.pdf

There are no pop-ups, sales or gimmicks- JUST PLAIN, GOOD, SIMPLE and LIFE CHANGING information.

I hope this helps your confusion.

Jim

September 7th, 2006 at 5:33 pm

[FYI - This "Jim" is not the same Jim as the author of this site]

As a fee-only CPA, MBA and CFP (TM) I am appalled at the effort put into this discourse by Mr. Acevedo regarding Bank On Yourself POLICIES (yes, these are insurance policies). As any informed adult is aware, whole life insurance policies are sold, and not bought, and this is simply another scheme to sell whole life insurance and enrich the salesperson.

Mr. Kindall: a “lens” is a term coined by the self-promotional “Squidoo” site Mr. Acevedo invites his prey to visit. And you are correct sir: this concept is “completely full of BS” and they are “trying to sell something.” Something that the majority of us simply do not need: a whole life insurance policy that does nothing more than siphon assets from productive, tax-saving saving and investment opportunities into the coffers and pockets of big insurance companies and their salesforce.

“If something sounds too good to be true, it probably is.” Warning signs: 1) the salesperson has no meaningful credentials other than insurance industry education (CLU, ChFC); 2) the salesperson is commission-based and not FEE-ONLY; 3) this is a once-in-a-lifetime opportunity that the mainstream financial advisor community is too uninformed and ill-educated to pick up on, but YOU, yes only YOU, can be the smart one and get into this private club with your secret password and then gain access to the protected, for-your-eyes-only special report (I’m getting ill); 4) of course let’s bring in tax saving opportunities and mis-represent conventional retirement planning as “only tax deferred.”

The facts are that two plus two actually do equal four. Mr. Acevedo is promoting a scheme that will entice you into purchasing a whole life insurance contract (and yes, Virginia, term-life is cheaper and better … look up Low Load). You will then put your capital to work by borrowing against your home (going into debt) to in effect take your equity from one pocket and put it into another. The problem is that Mr. Acevedo and his cohorts will be dipping into that other pocket to help themselves to ever-higher insurance premium payments.

Yes, you can safely make 8-10% annual returns long-term. Yes, most retirement plan investments are “only” tax deferred BUT THAT IS THE BEAUTY: tax deferral means you have use of the money and not the Federal government who will only spend it (and certainly Mr. Acevedo will not have it to buy more gas for his Porsche). There is a wonderful mathematical concept that these salesmen conveniently avoid: the TIME VALUE OF MONEY. The money that you tax defer is at work for you making far more in LONG-TERM CAPITAL GAINS (which are taxed at a maximum of 15%) than you will ever, ever pay out in taxes. Plus you get company matches, plus Roth IRA’s grow tax free forever (including in the hands of your heirs), plus …. oh I could go on for hours… I am steaming.

This is nothing more than a get rich quick scheme, and the person getting rich is Mr. Acevedo. Do yourselves a big favor and schedule a free, one hour initial consultation with a FEE-ONLY CERTIFIED FINANCIAL PLANNER:

Jim

September 7th, 2006 at 5:40 pm

[FYI - This "Jim" is not the same Jim as the author of this site]

Sorry, mis-clicked before I finished … now where was I? Oh yeah,

Visit a fee-only Certified Financial Planner (TM) practitioner who will give you the facts on these schemes. Pay him/her an hourly rate and you will keep your wealth working for you and not a salesman. Stay realistic, stay reasonable, stay away from scams, and you will get rich slowly and retire comfortably.

AJ -Learning Fast

September 17th, 2006 at 10:24 am

Jim,
Ahh all of those wonderful credentials, I was just recently ripped off by a fee based planner espousing the fee only approach. (Mine had the alphabet soup of credentials, too) My challenge is put your $$ or your malpractice policy where your mouth is. Prove your 8-10% and pay me the difference if you fail.

At least with a traditonal whole life contract you get contractual guarantees backed up by a regulated insurance company (I’d like to see you put your net worth up against theirs) and your beneficiaries get a tax free death benefit. Dont be so quick to knock others, any 3rd grader can do that.

Roy

December 11th, 2006 at 11:43 pm

Jim, I totally agree with you I was sitting at my computer with steam coming out of my ears when I was reading what Mr. Acevedo was saying it is absolutely insane that we have these people out there leaching off of the very people they should be trying to protect. I think it is amazing how one person can take common sense and flip it around to make it seem like it is a good idea.

Lee

January 19th, 2007 at 8:49 am

Uriel -

There are several things that Ms. Yellen says to look for in a Whole Life policy/company - Direct vs. Non-direct recognition, riders, etc.

Can you recommend a few companies and products that would work well with the Bank on Yourself concept?

Thank you, sir.

Rose

May 1st, 2007 at 5:04 pm

To those of you arguing that you will save more on taxes in a tax-deferred account than you will eventually pay, here is a very interesting article on the subject, which I found pretty eye-opening!

Qualified plans ‑‑ the ‘grand illusion’
http://www.worldchiropracticalliance.org/tcj/2006/jul/i.htm

(Note that this is not a financial website, though I don’t know much about the author of the article, but he brings up some very interesting points.)

joanna

September 29th, 2007 at 8:58 am

When I requested to take out my contributions from Roth IRA after 5 years, my advisor said that they had to charge 5% commissions because of the investment choice I made. Am I supposed to pay the deferred commissions if I have to take out money from Roth IRA?

joanna

September 29th, 2007 at 9:31 am

Sorry. I didn’t read the whole thing. But anyone can answer my question, I appreciate!