Lump sum ROTH IRA on January 1 vs grow emergency fund from 4 to 8 months living expenses.

Submitted by bobomb01 t3_z8z9ee in personalfinance

Hello,

I'm debating between these 2 options. I saved throughout the year with the intention of doing a lump sum contribution to my ROTH IRA on 1/1/23, but now I'm wondering if I should just add it to my emergency fund to bump it from 4 to 8 months living expenses.

I would still contribute on a regular schedule to my ROTH to take advantage of the full $6500 limit for 2023, but I've read that lump summing on 1/1 tends to do better in the long run. If I were to lump sum my ROTH, I would gradually grow my emergency fund throughout 2023.

I live in a low cost of living area, so my monthly expenses only equate to around $1600 a month. The caveat being the looming possibility of relocating to a higher cost of living area in the next 12 months. My 8-month emergency fund would then become something closer to a 4-month fund again, potentially. I split living expenses with my partner who has a steady, in-demand job, so I've been comfortable with a 3–4-month emergency fund. However, I feel like it's the bare minimum and I'd be more comfortable with 6+ months' worth of living expenses stashed away.

Thanks.

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TL/DR: Lump sum ROTH, add to e-fund with each paycheck -OR- Lump sum e-fund, add to ROTH with each paycheck.

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Comments

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varano14 t1_iye3thx wrote

If you have 4 months already AND your job stability is solid (even if you move) then I would vote for maxing your roth contributions for the year. How you do that for this year will likely be a wash over the next 20+ years. Just max it for every year.

Once your savings are stable then make the call on lump sum vs period.

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weiner_forest t1_iye40vv wrote

Time in market beats timing the market. Therefore, the earlier you invest, the better.

However, you shouldn't be adding to investments without a funded emergency fund where you feel comfotable. The only exception might be when you approach the end of the year and haven't maxxed out your contributions yet.

Since that's not the case for you, I'd get your efund to where your comfortable first. You got plenty of time (12 months).

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TN_REDDIT t1_iye4l81 wrote

I love the Roth because it allows for withdrawals (no emergency = no withdrawal )

3

diatho t1_iye68bi wrote

split the difference. fund half of both and fund the rest over the year.

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RelishMule t1_iye8i5k wrote

Replying to TN_REDDIT (#819,343)

This. Roths are a great place to stash emergency fund money if you are not otherwise going to be maxing your IRA space. Just don't invest it and it will be as safe as cash and just as available. Then when you start to get more cash flow going, you can build up a cash account for your Efund and you now have more money in a taxadvataged account that you couldn't get in there otherwise.

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RelishMule t1_iye8lba wrote

Replying to weiner_forest (#819,194)

> The only exception might be when you approach the end of the year and haven't maxxed out your contributions yet.

Even then, you could contribute the money to hit your max, but just not invest it

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SpiritualCatch6757 t1_iye9jjf wrote

In the grand scheme of things. Lump summing one year of $6500 Roth IRA isn't going to move the needle for you one way or another. Given, you can max your Roth IRA and add 4 more months to your EF, it really doesn't matter. Assume 7% in a Roth IRA versus 3% in a HYSA. That's ~$260? And if the recession happens, you lose ~$260?

And if it really doesn't matter, then I would opt to keep it simple and DCA monthly into your Roth IRA and EF. If you change your mind next month or 6 months down the line, sure, lump sum it.

Good luck, OP

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