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URL:  https://boards.fool.com/where-should-i-be-putting-my-quotrainy-day-13391635.aspx

Subject:  Re: IRA FOR ME Date:  9/29/2000  2:47 AM
Author:  Mark0Young Number:  6144 of 15438

Where should I be putting my "rainy day money" that I do not need for 15-20 years?

I always thought "rainy day money" was money one may want for financial emergencies or for spending sprees, depending on how one interprets a "rainy day". In either case, I thought the intent was to have it liquid.

If you know you will not touch the money for at least 15 years, a stock-based investment (stocks or stock-investing mutual funds) make sense. If you don't need the money until you are 59.5, putting it in a retirement account, such as an IRA or Roth IRA, and then having that account invested in stocks or stock funds would make even more sense. (Remember: "IRA" or "Roth IRA" designate the type of account; stocks or mutual funds specify the investments money in that account is in. An "IRA" or a "Roth IRA" account used for saving or investing money provides tax benefits that one wouldn't have if the money were in a regular account that was invested in stocks or stock mutual funds.) The Roth IRA has the advantage that you can take out contributions at any time, but one could be exposed to taxes and penalty if one takes the earnings out before one qualifies to take out the earnings.

If by "rainy day money" you mean money that you want to be able to access in short notice, but may be untouched for a long time, one option is the Roth IRA
if one considers only the contributions as liquid, but the earnings within the Roth IRA account should be considered untouchable until one is 59.5. Otherwise, one has to stick with regular (taxable) accounts. For maximum flexability with virtually no risk, a money market fund or money market account would make sense. (That is where I have part of my emergency fund.) Another option that is guaranteed safe and may be a great deal if one lives in a high state income tax state is I-Bonds (savings bonds), which can be redeemed at most banks after one has held the bond for at least 6 months, the taxes on the interest can be deferred until one redeems the I-Bond (so the interest can compound without ongoing tax obligations until one cashes one in, or until the bond reaches final maturity in 30 years), and it is free from state or local income tax. To discourage early redemptions, if one has held the bond for less than 5 years before redeeming, the most recent 3 months of interest is forfeited.

If one doesn't mind some volatility and potential loss of principal (which means this is for 5 years or longer, and one doesn't want a guarantee that the principal will always be there), one could look at stocks, tax-managed funds, or tax-efficient funds. (Index funds like an S&P500 index fund or a Total Market Fund would tend to have lower turnover than an actively managed fund, and thus less ongoing tax obligations).

A bond fund would typically provide returns that are somewhere between a savings bond and a stock fund, but some years the returns will be lower than ohter years. However, the volatility will be less than with a stock fund.

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