Ask Money

When to take the Roth plunge

Chris Farrell Jul 22, 2011

Question: I am in my early 30’s and have amassed a savings around $25,000 (excluding retirement accounts),which is currently just sitting in a low interest savings account. I know I should invest this money and have talked to my boyfriend (who is well versed in retirement/savings options) about starting a Roth IRA, in addition to several other retirement savings accounts. I am reticent to take the plunge, because we bought a condo together last year and are considering expanding it, with the purchase of another smaller unit in the coming year. What do you suggest I do in the meantime? Shana, Chicago, IL

Answer: Congratulations on your savings.

The big advantage of the Roth is that although contributions are with after-tax dollars you don’t pay any tax on accumulated gains when you withdraw the money during retirement.

Less appreciated is that a Roth is also a savers “emergency” emergency fund. You can always take out your Roth contributions tax-free and penalty-free. It’s only true for your contribution. You will pay taxes and a penalty if you withdraw earnings from the Roth.

I share your reluctance on taking the Roth plunge until you have a better sense of what you plan on doing with the condo. It doesn’t really make sense to open up a Roth with the thought of withdrawing the contributions in a matter of a few months. The reason I call a Roth an emergency-emergency fund is that it’s a source of savings you don’t want to tap unless you have to in a pinch. It’s reassuring to know that it’s an option, however.

For now, with all the turmoil in the global economy I would accept the lower rates on your savings and keep the money safe. But if you do end up with some extra money and you want to put it toward retirement the Roth is a good idea.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.