Emergency Fund question

[jennyerin]

So you work hard to save an emergency fund. What happens when your child is getting ready for college. Do the colleges look at you emergency fund as money that could go for college and decrease your financial aid? It would be frustrating if that happens. What does everyone do? Thanks!

 

[clh2]

So you work hard to save an emergency fund. What happens when your child is getting ready for college. Do the colleges look at you emergency fund as money that could go for college and decrease your financial aid? It would be frustrating if that happens. What does everyone do? Thanks!

You do not get to "exclude" your emergency funds when filling out your FAFSA, they are most likely in a regular savings account (i.e. a non-retirement account), and will need to be included as such. I do not believe that FAFSA looks at what is in your retirement accounts, but some schools might have additional forms to fill out, and might ask for that information.

 

[Marionnette]

So you work hard to save an emergency fund. What happens when your child is getting ready for college. Do the colleges look at you emergency fund as money that could go for college and decrease your financial aid? It would be frustrating if that happens. What does everyone do? Thanks!

Colleges look at all of your financial assets with the exception of your retirement savings. Your "emergency fund" is nothing more than another savings account as far as they are concerned. But if it's any consolation, they place a bigger emphasis on what your child has in his own name than what they place on what the parents have.

 

[KennesawNemo]

In this case, should one put more money into Roth IRA?


It's retirment, but you can withdraw your contribution penalty free as long as you don't touch the earnings.

Of course the downside is you may loose money and won't be able to recoup everything back before your kids college time.

 

[Marionnette]

In this case, should one put more money into Roth IRA?


It's retirment, but you can withdraw your contribution penalty free as long as you don't touch the earnings.

Of course the downside is you may loose money and won't be able to recoup everything back before your kids college time.

You need to meet strict guidelines for being able to withdraw from a ROTH without penalty before the age of 59.5 years. There's a 10% penalty for withdrawing your contributions early unless the withdrawal is:

• Made to a beneficiary or estate on account of the IRA owner's death
• Made on account of disability
• Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
• Qualified first-time homebuyer distributions
• Not in excess of your qualified higher education expenses
• Not in excess of certain medical insurance premiums paid while unemployed
• Not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
• Due to an IRS levy, or
• A qualified reservist distribution

http://www.irs.gov/taxtopics/tc557.html

 

[RitaE]

The 10% penalty plus tax on the Investments applies to money that is withdrawn from a Roth and included in Income (such as Interest, Dividends, or Capital Gains). I believe KennesawNemo is referring to the tactic of being able to withdraw the Contributions (basis) of the account tax and penalty free which is covered in IRS Publ 590.

This is a tactic frequently recommended by Financial Planners to some extent. Keeping track of your basis and correctly ordering the Distributions is kind of a pain in the butt and it isn't something you are going to want to do for several distributions every year. This is something that is better for the "This is long term emergency money that I want to keep available but hope I never really need." You will still want to keep it in a rather safe and boring vehicle inside the Roth such as a Money Market Savings or Certificate of Deposit.

I would still suggest keeping a base amount (a couple of month's income) in a more standard savings account but many people use the Roth and Health Savings account rulings to shelter more unspecified long term money.

 

[KennesawNemo]

You need to meet strict guidelines for being able to withdraw from a ROTH without penalty before the age of 59.5 years. There's a 10% penalty for withdrawing your contributions early unless the withdrawal is:

• Made to a beneficiary or estate on account of the IRA owner's death
• Made on account of disability
• Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
• Qualified first-time homebuyer distributions
• Not in excess of your qualified higher education expenses
• Not in excess of certain medical insurance premiums paid while unemployed
• Not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
• Due to an IRS levy, or
• A qualified reservist distribution

http://www.irs.gov/taxtopics/tc557.html

I always have the impression that:

If I put $1000 into my Roth IRA, the investment earns me $200. I have $1200 in total and I can always get $1000 out penalty free. There will be penalty for the $200.

Of course, I can be wrong! Please correct me in that case.

I can't find a direct IRS reference, but here is a link, but of course she can be wrong too:

http://money.usnews.com/money/blogs...2/08/06/can-a-roth-ira-be-your-emergency-fund

 

[sksjasams]

Colleges look at all of your financial assets with the exception of your retirement savings. Your "emergency fund" is nothing more than another savings account as far as they are concerned. But if it's any consolation, they place a bigger emphasis on what your child has in his own name than what they place on what the parents have.

This is true. It would hurt financial aid a lot more if that money was in your child's name. They will only count like 5.6% of your emergency fund toward your family contribution.

 

[mom2alix]

I always have the impression that:

If I put $1000 into my Roth IRA, the investment earns me $200. I have $1200 in total and I can always get $1000 out penalty free. There will be penalty for the $200.

Of course, I can be wrong! Please correct me in that case.

I can't find a direct IRS reference, but here is a link, but of course she can be wrong too:

http://money.usnews.com/money/blogs...2/08/06/can-a-roth-ira-be-your-emergency-fund

This is correct. It can be a little tricky, but it does work.

 

[mom2alix]

So you work hard to save an emergency fund. What happens when your child is getting ready for college. Do the colleges look at you emergency fund as money that could go for college and decrease your financial aid? It would be frustrating if that happens. What does everyone do? Thanks!

Here's a couple of calculators that may help you. You can play around with the numbers and see how much difference it makes. I've looked at it to gauge our future situation (DD, our oldest, is still in middle school) and putting our savings into the calculator versus leaving it out didn't make much difference. Basically it seems to be looking at our income and thinking we should be able to contribute 25% of what appears in line 7 of our 1040. YMMV, but it's a good place to start playing around with the numbers.

https://fafsa.ed.gov/FAFSA/app/f4cForm?execution=e1s1
http://www.aie.org/managing-your-money/finance-tools/EFC_Calculator/EFC_Dependent.cfm

 

[michelleh1]

I was thinking the same thing this morning and thinking about putting our savings into our Roth for the same reason. It's truly emergency money that has taken us years to save and will not be used for college expenses.

 

[Jeff_G]

I always have the impression that:

If I put $1000 into my Roth IRA, the investment earns me $200. I have $1200 in total and I can always get $1000 out penalty free. There will be penalty for the $200.

Of course, I can be wrong! Please correct me in that case.

I can't find a direct IRS reference, but here is a link, but of course she can be wrong too:

http://money.usnews.com/money/blogs...2/08/06/can-a-roth-ira-be-your-emergency-fund

Just keep in mind you should have emergency funds outside a Roth IRA if you take this route. What if there is a downturn in the stock market and you need to use your emergency fund. You don't want to have to sell at a low point.

 

[supersnoop]

Your emergency fund, whether in a saving account, money market, brokerage, or IRA, should always be invested in a stable value investment.

 

[RitaE]

Just keep in mind you should have emergency funds outside a Roth IRA if you take this route. What if there is a downturn in the stock market and you need to use your emergency fund. You don't want to have to sell at a low point.

Roth IRA funds don't have to be tied to any sort of stock market or volatile investment. You can hold a Money Market account in a Roth, you can hold a Savings Account in a Roth, you can hold CDs in a Roth …. you can … well you get the idea. If you go to the Ally Bank website right now, they are offering some sort of bonus for you to sign up your Roth IRA with them and safely earn 1%.

I have a couple of clients who hold Real Estate in a Roth IRA although that obviously wouldn't be a good idea here since liquidity is the primary factor.

 

[KennesawNemo]

Just keep in mind you should have emergency funds outside a Roth IRA if you take this route. What if there is a downturn in the stock market and you need to use your emergency fund. You don't want to have to sell at a low point.

Yeah, I did mention in my first post the down side is that you might not have enough time recoup you loss when you need the money.

The way to go is to be really conservative, buy only bonds or MM investments. It won't do much worse than a saving account.

Here is my personal emergency fund structure:
1. One month expense in a saving account associated with my checking account. This is for big expense that does not happen a lot but does happen, like new car, new appliance, or new roof.

2. Six month expense in a high yield saving. This is for job loss or serious illness.

3. I use to put all my retirement saving into my 401K, but I am now only putting whatever is needed to get maxim company match. The rest is into Roth IRA. I like the relative "liquidity" although I am not sure what kind of emergency I will use that for, but I like to be prepared.

 

[msmayor]

I was thinking the same thing this morning and thinking about putting our savings into our Roth for the same reason. It's truly emergency money that has taken us years to save and will not be used for college expenses.

Understand, though, that just because you have 'protected' your savings and it may appear that you have very little to pay for college...that in no way means that one will qualify for 'free' aid.

Stafford and Parent PLUS loans ARE considered aid and you can still find yourselves paying a good chunk of $$ out of your own pocket to get the college bills paid.

I have seen many a parent shocked when that financial aid award comes and the only aid listed is loans.

 

[Marionnette]

Understand, though, that just because you have 'protected' your savings and it may appear that you have very little to pay for college...that in no way means that one will qualify for 'free' aid.

Stafford and Parent PLUS loans ARE considered aid and you can still find yourselves paying a good chunk of $$ out of your own pocket to get the college bills paid.

I have seen many a parent shocked when that financial aid award comes and the only aid listed is loans.

There are so many parents that I spoke with who thought the same thing when our kids were in high school. There isn't a lot of free aid out there and most of it goes to kids from families with very little income. The rest of us are on our own.

One piece of advice that I do have is to get your FAFSA done as early as possible every year. Most colleges and universities will dole out private grants and needs-based scholarships very early. Our daughter got a nice grant from her university one year because so few of her classmates' parents filed their FAFSA early enough to meet the decision deadline. There is no way that our income would qualify for state or federal grant money! It wasn't a huge grant when compared to the cost of tuition, but every little bit helps. Grant money does not need to be repaid, so it was similar to getting a scholarship for the year.

 

[michelleh1]

Understand, though, that just because you have 'protected' your savings and it may appear that you have very little to pay for college...that in no way means that one will qualify for 'free' aid.

Stafford and Parent PLUS loans ARE considered aid and you can still find yourselves paying a good chunk of $$ out of your own pocket to get the college bills paid.

I have seen many a parent shocked when that financial aid award comes and the only aid listed is loans.

You are right! I went to a link that was posted that estimated how much we would receive. Our savings is small enough that all of it was exempted. However, they still show us paying a good chunk of the bill. We are still a few years away from college, but it's giving me a good idea of where we'll be and what we can do to plan for the expenses.

 

[allison443]

You are right! I went to a link that was posted that estimated how much we would receive. Our savings is small enough that all of it was exempted. However, they still show us paying a good chunk of the bill. We are still a few years away from college, but it's giving me a good idea of where we'll be and what we can do to plan for the expenses.

From my experience (3 kids) and most people we know, the Expected Family Contribution is very dependent on your income. It seems anywhere from 25-35% of your income.
Also families need to be aware that many of the top schools only give need-based aid. Also that not every school guarantees to meet your need. For example, if the school's cost of attendance is $55,000, and your EFC is $25,000, a school will not automatically give a grant of $30K. They may package a federal loan, grant, work study, and still leave a "gap" in the total amount.

 

[aprilgail2]

This is true. It would hurt financial aid a lot more if that money was in your child's name. They will only count like 5.6% of your emergency fund toward your family contribution.

Both college planning seminars I went to said to get all the money out of the kids names and put it into your own. I ended up opening a TD bank account in my name and putting most of her money into that one-she has the debit card so she can get to it if needed. The only thing I couldn't move was a child performer trust account since that is locked and has to be in her name-but it was always known that the money she earned in there was for college.