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Roth IRA As An Emergency Fund

Here is a question (paraphrased) posed on the Fatwallet Finance forum:

If I make a contribution to my Roth this year (2006) and then withdraw that amount, does it count against my yearly contribution? The short answer is No. According to Chapter 2 of Publication 590 on Roth IRAs [3], “If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them.” (link [4])

So, Joe Bucks contributes $2000 to his Roth IRA in January of this year as a 2006 contribution (since you’re able to make contributions for the prior year all the way until the day your tax filing is due). In July 2006, a pipe bursts in his home and Joe needs to find money to help fix the damage. He can dip into his Roth IRA and withdraw the $2000 he contributed in $2000. In November of 2006, he receives a profit sharing bonus from where he works and now is able to put the maximum $4000 into his Roth IRA. So, while the net effect is a +$4000 into his account, he’s contributed $6000 and withdrawn $2000.

Roth IRA 2006 Contribution:
Jan-2006: $2000
July-2006: $0
Nov-2006: $4000

Correct me if I’m wrong but what this means is that you can use your Roth IRA as a short term emergency fund and not suffer consequences. While you can always take out money from your Roth IRA tax-free, you can’t contribute into prior years. So if Joe had to dip into his 2005 contributions, he would be able to get the money tax free but he wouldn’t be able to replace it afterwards.