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I have maxed out my 401k contributions and, since the credit cards are all paid off, have been building a cushion in a passbook savings account (at a princely 1.25% interest). What I'd like to do is to open Roth IRAs for myself and my wife, so the money is still available for an emergency. I've found a lot of good information, but the one thing that seems simplest I haven't seen. Where should I go to open these accounts?
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Greetings TMadigan, and welcome. You asked:

<<I have maxed out my 401k contributions and, since the credit cards are all paid off, have been building a cushion in a passbook savings account (at a princely 1.25% interest). What I'd like to do is to open Roth IRAs for myself and my wife, so the money is still available for an emergency. I've found a lot of good information, but the one thing that seems simplest I haven't seen. Where should I go to open these accounts? >>

Any fund or broker of your choice will help you do that. It's really a matter of where you wish to invest. For details on opening an IRA, see the article in our IRA area at this link:

http://www.fool.com/Money/AllAboutIRAs/AllAboutIRAs14.htm

Regards..Pixy
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Well, the first thing I would do is take the money that you've got in the passbook savings account and put it into a money market or ultrashort bond fund. A five percent yield is a hell of a lot better than a 1.25 percent yield.

You can open up a Roth IRA with a discount broker, a full service broker, an individual mutual fund, or your bank, just to name a few. It's all up to you.
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open Roth IRAs for myself and my wife, so the money is still available for an emergency

****

I think there are penalties for withdrawing contributions to a Roth that haven't been in place for 5 years (5 year rule?). If true, these would prevent the funds from being used in an emergency.

You can probably can find details in Pub. 590.
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Pixy, et al,

What I'd like to do is to open Roth IRAs for myself and my wife, so the money is still available for an emergency


is ROTH money really "available for emergency"?


thx,

jp
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moseykitty writes:

I think there are penalties for withdrawing contributions to a Roth that haven't been in place for 5 years (5 year rule?). If true, these would prevent the funds from being used in an emergency.

I reply:

There is such a rule, but it doesn't always apply. There are three ways money can get into a Roth IRA account: (1) annual contribution (limited to $2000 annually), (2) conversion from traditional IRA, and (3) earnings (yaaay!). By operation of law, the first money you remove from a Roth IRA is deemed to consist of annual contributions. Those may be withdrawn at any time without tax or penalty.

Once annual contributions are exhausted, the next withdrawals are deemed to be money converted from traditional IRAs. That's where the five tax-year rule comes in. If withdrawn prematurely (during the five tax years after the first conversion), converted funds are subject to the 10% penalty, but no other tax (because they were taxed upon conversion, if not earlier). Incidentally, this structure appears to open a loophole. Convert a small amount of money to a Roth IRA today, and once five years have elapsed, any further conversions can be immediately withdrawn without penalty. In other words, unless the law or regulations change, this is a penalty-free method of getting money out of a traditional IRA.

Finally, once conversions are exhausted, all remaining funds are deemed to be earnings. If withdrawn prematurely, they are subject to both tax and penalty. --Bob
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JP asks:

<<is ROTH money really "available for emergency"?>>

It's a poor substitute for an emergency fund, but it can be used as such after a limited fashion. Annual contribution money can be taken at any time without tax or penalty. Conversion contributions can be taken without taxes or penalty after five tax-years. Earnings taken before age 59 1/2 will be taxed and penalized. Earnings taken after age 59 1/2 but before the account has been open for five tax-years will be taxed only.

The Roth IRA has an ordering rule for withdrawals. The first money out is always considered annual contribution money until it's gone. Next comes conversion contributions from oldest to latest until it's all gone. Last comes earnings.

Regards..Pixy
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I would suggest that emergency money go into a money market or ultra short bond fund, and I would say that if it's taxable, so what? You don't want to put emergency money into something that keeps you from withdrawing it when you need it just to save a few bucks on taxes.
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