Ask the Grumpies: Is there any reason not to put money in a Roth IRA if you can pull out the principal at any time?

Beth asks:

Short version of this question: if I have some money saved that I don’t expect to use in the next year or so, and I don’t have any non-mortgage debt to pay off – is there any reason NOT to put that savings into a Roth account?

Longer version:
I feel I am in okay shape in terms of retirement savings (far better than most Americans, not doing as well as the FIRE community), with 10-20 more years to go (preferably 10 years from now, depending on the market & health care). Because I”m in okay shape and max out my 401(k), I haven’t been saving in a Roth. Instead I’ve been focusing on paying down my mortgage (still about 10 years out) and enjoying my life in the moment.

I have been putting aside money in hopes of self-funding a sabbatical at some point. My vision is I’d arrange a leave of absence for up to 3 months; I’m not at all sure my employer will go for it so it’s all quite hypothetical. I’m too conservative/aware of age bias to quit my job without another lined up and I would really really like a chunk of time off. Words cannot express how I envy friends who work in academia and get summers off! (future post? brainstorming jobs that get summers off but don’t require being a teacher?)

I realized that I could set the hypothetical-sabbatical money aside into a Roth account, and pull out the contribution to use if I DO have a sabbatical, and if I don’t, then I’m that much closer to being in even-better retirement shape.

Is there any reason to NOT put my savings into a Roth? My usual tendency is to go VTSAX but I might be more conservative with this money since I would like to use it in the shorter term. Or, by putting it into a Roth, am I going to mentally classify it as untouchable?

I’ve got other money sitting in an emergency fund (combo of money market and VTSAX) and am now wondering why I haven’t put it in a Roth all along. Please advise!


If you qualify to do a regular Roth IRA without having to convert from a traditional IRA, the only reason not to would be having to deal with figuring out how to take out the principal and any other paperwork costs. For that reason it’s good to have some cash in an emergency fund (the money market in your case) in case you need money immediately without paperwork hassle (because short-term emergencies often come with mental and emotional angst and the last thing you need is a month delay because of some sort of paperwork snafu). So… I guess laziness is the main reason not to? If you’re planning on using Vanguard I doubt it will be that difficult to get your principal out (some other providers make taking any money out more of a hassle).

You can put money in VTSAX within the Roth! Though yes, within the shorter term you might want to stick it in a bond fund or something similar. The heuristic is generally to put money you think you’ll need in more than 5 years into stocks and to be more conservative with money you’ll need sooner.

If you can only do Roth IRAs through a traditional conversion (a Backdoor Roth) because you’re too high income to contribute to a Roth directly, you have to wait 5 years to access the Roth funds, at least according to this random website I found. So if you need the principal sooner than that, you might want to avoid doing a Backdoor Roth and instead save the money as taxable.

Here are some reasons you could withdraw distributions (not just principal) from a Roth without penalty.  (They include things like disability, first time house purchases, educational expenses, etc.)

Grumpy Nation, is there anything I haven’t thought of?  Have you ever withdrawn the principal from a Roth IRA before age 59.5?

8 Responses to “Ask the Grumpies: Is there any reason not to put money in a Roth IRA if you can pull out the principal at any time?”

  1. monsterzero Says:

    We did this when buying our house a couple of years ago, and H&R Block didn’t warn us about filing a Form 8606, so this year the IRS tried to say we owed them $5000 and it took months to straighten out.

    Vanguard reported it as a withdrawal of earnings by default, and I don’t recall there being a way on their site to have them designate it as contributions. They did make it super easy to withdraw the funds though. :)

  2. SP Says:

    Bonus question: If you have access to a mega-backdoor ROTH (or I guess just a backdoor or regular ROTH that you don’t really need to add to for retirement purposes), is there any reason not to use that for dependent college savings in place of a 529

    I couldn’t come up with a good reason, other than “you might need that space for retirement”, which becomes less likely with mega backdoor options. Oh, you don’t get to take out any of the gains tax free. That’s probably the biggest deal. And you can’t use the principle for early retirement, if that was on the table. So there are some drawbacks.

    I still like this scheme, although I guess it is kind of a niche scenario.

    • nicoleandmaggie Says:

      If I could go back in time, I would contribute what we contributed to the 529 when we weren’t maxing out our retirement and put it towards retirement instead.

      There are some financial aid implications for some ways of withdrawing that suggest parents taking out loans and repaying after is better than withdrawing from a retirement account. I think I read a Forbes article about it at some point.

      • First Gen American Says:

        I just learned that there is a difference between back door roth and regular after tax savings. If you keep your after tax contributions within the 401K, earnings are taxable if you’ve already maxed out your pre-tax contributions. This happened to me on a small scale because I max my pre-tax based on salary but contributions from bonuses went in as after tax contributions and after 8 years, it added up. Should have been converting annually so those earnings weren’t taxable….plus the whole 5 year rule. Laddering makes sense if you’re going to retire before 65.

        When 529s first started, I don’t think there was an option to use Roth for college, now I am going to double down on the backdoor option with the Roth. Not sure if I should just bail on the 529s altogether though.

  3. Debbie M Says:

    I took some money out once before age 59 1/2 (Vanguard) with no problem.

    Normally I would say there was no reason not to do so. Now I’m thinking that paying off a mortgage might be smarter, especially if it’s not fixed, since the stock market is pretty high, but that doesn’t work for your situation, because you want the money back. Yep, put it in, and if it turns out you end up not using the money, then it’s protected for future retirement uses. If it has lower fees than our 401K, you might want to divert some of that money, too, so long as you’re still maximizing any company match.

    Looking forward to a summers-off brainstorming post in the future (though I personally have very few suggestions)!

  4. bogart Says:

    Ooh, soapbox! I personally am of the opinion that anyone who can make ordinary contributions to a Roth IRA but isn’t already/otherwise doing so and has cash (or close) in savings should absolutely, positively put that savings in a (cash or close) Roth IRA.

    Unless of course they should be doing something else altogether, which is really a separate question. But just comparing those 2 — cash in a savings or money market account or a CD versus a Roth? Just do it.

    Yes, I have taken money (contributions) out of my Roth to spend on other things (downpayment on a home but didn’t qualify for the specific Roth home purchase as not a first-time homebuyer — still fine to remove contributions). No it was not at all difficult.

    Bonus fact: you can give yourself a short-term loan once a year by pulling $ out of a Roth provided you put it back in (or in another Roth) within 60 (calendar) days. If you do this, it’s treated as funds you intended to rollover (maybe you did roll them over to a different Roth) but didn’t.

    Save your 5498s. Those are the forms provided to you each year by the account provider (bank, etc.) that document how much you contributed to your Roth. But if you don’t save them, you can request them from the IRS, they will provide them to you.

  5. First Gen American Says:

    So, I am not sure if you are old enough to have lived through the 2008 crash financially, but at that time, I was saving a lot more into the stock market vs paying off my home. When I lost enough money on paper to have paid off my home with that amount, it made me reassess what made sense. At least with a paid off home, you can live in it. It’s tangible. (The caveat being that my balance was I think $75k at the time so payoff was something I could envision happening in under 5 years). It absolutely isn’t the best choice as far as a long term investment and can be horrible if you have to sell it at the wrong time, but it offered me a piece of mind that if the stock market tanked again, at least my expenses were now very low because of no mortgage payment.

    So, if the stock market dropped by 30-40% in the next year, would you regret not putting more towards your house?

    PS. I too would love a job with more time off. I think this is what semi-retirement looks like. I just haven’t found the role that can easily do that yet.

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