If you haven’t done so already, you have a week left to fund an IRA for 2011. This goes for both traditional and Roth IRAs, but a Roth IRA has a special advantage (aside from the tax differences).
In short, non-rollover Roth IRA contributions can be withdrawn at any time, for any reason, without taxes or penalties. If you don’t believe me, check out IRS Publication 590 for details. Or see here for a plain English explanation.
Don’t get me wrong… I’m not suggesting that you should plan on raiding your retirement accounts early, but this little factoid gives you the ability to stretch your contributions to the max without having to worry about over-extending yourself.
Said another way, if you have enough cash on hand to fund a Roth IRA, you should think about going ahead and doing so — even if it means dipping into your emergency fund. After all, if you find yourself in a pinch, you can always undo the contribution.
If everything works out for the best, you’ll be able to rebuild your savings without pulling that Roth contribution back out and you’ll be ahead of the game. And if you car breaks down, you lose your job, or whatever, you can always undo the contribution.
One of the main reasons I like this strategy is that you’re limited to contributing a limited amount of money each year, and you can’t go back in future years to make of for contributions that you skipped. Thus, you should do whatever you can to lock in your contributions while they’re available.
A few things to watch out for:
- Be sure you’re contributing to a Roth IRA because traditional IRAs don’t offer the same flexibility to undo contributions.
- If there’s a chance you might need to pull this money back out, don’t invest it aggressively. Instead, hold it in a low-risk investment vehicle until you’ve rebuilt your regular savings.
- Be careful not to exceed your contribution limits. Remember… Your traditional and Roth contributions are subject to a common limit so don’t try to contribute $5k to each.
- As always, be aware of the income limits for Roth IRA contributions. If you earn too much, you’ll have to jump through a number of hoops to get money into a Roth.
And don’t forget about next year… The clock is already ticking for your 2012 IRA contributions.