Tax day is three weeks away. This means that you have two weeks to fund an IRA and have it count toward the 2012 contribution limit.
If at all possible, you should do this. Why? Because once the window closes, you can’t go back and make up for a missed contribution.
If you’re concerned about spreading yourself too thin, consider funding a Roth IRA. I say this because the rules governing Roth IRAs allow you to withdraw your contributions at any time and for any reason.
That’s right. You can withdraw your contributions whenever you want and whyever you want. Without penalty. Details can be found in IRS Publication 590.
In general terms, I view this rule as somewhat of a liability. After all, the point of an IRA is to save for the future. You’d thus be doing yourself a serious disservice if you raided it to buy a boat, remodel your kitchen, or go on vacation.
But the ability to withdraw your contributions does gives you the flexibility to contribute to a Roth IRA even if you’re not sure that you can afford it.
So even if you have to dip into your rainy day fund, there’s little risk in funding a Roth (assuming you heed the final bullet point, below). Just make the contribution, cross your fingers, and save like mad.
If all goes well, you’ll lock in that contribution and re-build your cash cushion before your need to dip into it. And if something goes horribly wrong, you can always contact your IRA custodian and ask for your contributions back.
Some important considerations:
- Be sure to do this with a Roth IRA. The withdrawal rules are different (much more strict) for traditional IRAs.
- Be aware that only original contributions are subject to such lax treatment. To withdraw conversions without consequence, your account has to satisfy the “five year rule.” And the rules are even more strict for earnings.
- Be sure to respect the current contribution limits. These limits are combined for Roth and traditional IRAs, so be careful.
- Keep in mind that Roth IRA contributions aren’t tax deductible, whereas you may be able to deduct traditional IRA contributions.
- Finally, be sure to keep you investments (very) conservative if there’s a chance that you’ll need to access the money anytime soon. You can always ratchet things up once you’ve re-built your cash cushion.