For those people, there are creative ways to have an emergency fund. The four I’m going to tackle in this article are: Roth IRAs, health savings accounts , utilizing your home equity and considering smart ways to use credit cards.because your contributions into a Roth IRA go in after tax, and you can access them at any point without negative tax consequences – from both the income tax and penalty tax standpoints.
When you do withdraw, try to take out only your contributions – and not earnings – to avoid penalties. Investment growth in a Roth IRA could be subject to both income taxes and a 10% early withdrawal penalty tax if distributed within five years of the account and you are under age 59½. In other words, limit the amount you withdraw to cover your emergency to the amount you’ve put into your Roth IRA.
But if you’re contributing into an HSA, the biggest benefit is actually achieved by investing inside of the HSA and letting your investments grow tax-free – not the tax deduction in year one. Look at your HSA as a retirement health care savings vehicle, not just as a way to deduct your deductible for the year.
One strategy is to set up a home equity line of credit . Some HELOCs can be set up with little or no upfront costs. Instead, costs kick in when you actually borrow from the HELOC and tap into the line of credit. This strategy gives people the flexibility to borrow if or when an emergency occurs, without having a negative impact on their investments or cash flow if they don’t need the money.
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