Using a Roth IRA to Start an Emergency Fund

How many times have you used a tool for something other than its intended purpose? My father, a medic in the Army during the Vietnam War, brought back a pair of surgical clamps. As a kid, I found them in his tackle box and wondered why they were there. One day, after finally catching a fish, he pulled out the clamps to remove a swallowed hook. It was the perfect tool for an unintended use. Last week, I bought a pair on Amazon for the same reason.

The IRS also gives us tools—some more flexible than we think. One such tool is the Roth IRA. While it’s designed for retirement savings, it has a unique feature: You can withdraw your original contributions at any time, tax- and penalty-free. That’s because the money you put in is after-tax. Earnings must stay put until age 59½ (unless you qualify for an exception), but your principal is yours to tap if needed.

I often meet with the adult children of clients to talk about saving and financial planning. With younger individuals, resources are usually tight, so prioritizing where every dollar goes is crucial. I always recommend two key starting points: build an emergency fund and begin contributing to a Roth IRA.

Here’s where the surgical clamp analogy comes in. Just like my dad used those clamps for fishing, you can use a Roth IRA in a nontraditional—but smart—way: as your emergency fund.

This strategy allows someone to hit two targets with one arrow—starting a retirement account while building a financial cushion. Contributions to a Roth IRA are capped ($7,000 for those under 50 in 2025), so starting early is essential. In fact, if your income grows too high later, you may not be eligible to contribute at all.

The chart below illustrates the potential benefit of using a Roth IRA as an emergency fund compared to a traditional savings account, assuming modest annual returns over 10 years:

Source: Advisors Capital Management. Assumptions: Roth IRA grows at 3% annually; traditional savings grows at 0.5% annually over 10 years.

Initially, you’d want to keep the Roth IRA invested conservatively—in something like a high-yield money market or ultra-short bond fund—so you don’t risk losses if you need the money unexpectedly. As your income grows and you can fund a separate emergency account, then you can then transition your Roth IRA investments to reflect a longer time horizon and more growth potential.

By taking this approach, the young investor ends up with years of Roth contributions that grow entirely tax-free—assuming they weren’t needed for an emergency. And even if they were, the ability to access those funds without tax or penalty makes the Roth IRA a uniquely flexible tool—just like those old surgical clamps.

Next week, we’ll follow-up with our annual reminder about the benefits of starting to fund Roth IRAs early for children and grandchildren as soon as they start earning from a summer job.  In the meantime, let us know if you have any questions, or have suggestions we can share for any other unique tools that you may find useful.

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