Should We Dip Into Savings to Jump Start an IRA?

by Kevin on August 24, 2008

If you’ve been following No Debt Plan for a few months you’ve probably caught on that we are debt free (expect mortgage and my current small student loans still in deferral). We’re on our way to building wealth — to financial freedom. I’ve got a 401k, my wife’s school system has a retirement plan, and we’ve opened up a Roth IRA in my name with Vanguard.

We also recently just completed our 3 month emergency fund. We’ve also saved up some money for a planned trip to New York City next summer. We seem, for now, to be in good financial position.

Our Roth IRA contributions come out each month (manually). The plan is to max them out every year — this is our first year so we are paying into the IRA with rather large payments each month so we can max out before April of next year. If we can somehow swing it, we’d eventually like to max it out by the end of December for that tax year.

My IRA is nearing it’s limit for this year; we need to open an account in my wife’s name. However, with Vanguard you need $3,000 to invest in all but one of their funds. At our current rate of saving it would take two or three more months to get to that point (we have some saved already).

I am considering taking money out of the NYC trip fund and opening the IRA at the end of this month. We would then be invested in the market, have the account open a few months earlier, and pay back the “loan” to ourselves over the next two or three months.

I don’t see any major flaws in this plan, but wanted my astute readers to think it over and give me their thoughts. Remember, we have an emergency fund and there are no expected drops in income coming. Our cash flow should remain steady, leaving us with this money to save/invest every month.


  • 3 month emergency fund
  • NYC trip fund
  • opening up new Roth IRA, dipping into NYC trip fund and paying it back over the next few months

Do you see any flaws? Would you do it?

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Ricky August 25, 2008 at 2:57 pm

Well I do not see any major red flags in you plan, but I have to ask why? If you stick with your plan right now you have a wonderful paid in full trip to New York, and you have your wife’s Roth account well on its way by year end. If you dip into the trip money and all goes well with your new plan, the net result is essentially the same. The only difference is your wife’s Roth account has chalked up a couple months of growth. What if something goes wrong though? You have virtually eliminated all potential risk, but it is impossible to completely eliminate risk. If you change your plans, there is a chance, albeit a tiny one, that you will be left holding the bag on a partially paid for trip to New York. I doubt anything would go wrong, but I am not sure would take the risk when there seems to be so little return. Maybe I am off base. What does 3 or 4 months of extra growth time equate to over the life of a Roth IRA? It’s your money, and you have illustrated your competence in the world of personal finance, but I can’t say I would do it.

Matt August 25, 2008 at 3:30 pm

I think the call is really up to you: do you want to time the market or not?

Since your NYC trip is almost a year away, and your emergency fund is in place, my vote would be YES – go ahead and fund the new Roth IRA.

As of today, the S&P 500 is looking fairly cheap if you are looking to make an index fund purchase. It’s very difficult to time the market, but since you are also dollar cost averaging yourself in each month, in 40+ years it will make little difference when you made your first big purchase.

Marcus August 25, 2008 at 5:58 pm

I agree with he two other comments. I do not see any MAJOR issues with proceeding as suggested. However, another avenue could be to offset some of the risk (of depleting your trip fund) by going 50/50. Pull 1500 from the trip fund to fund your spouses Roth. Then, worse case scenario you go on a local vacation vs. New York City. This is based of course on what little info provided. Like Matt stated……. it is up to you. I guess it might depend on how dead set you are on NYC.

LivingAlmostLarge August 27, 2008 at 5:53 pm

Not a huge deal either way. Depends on if you want to be invested or not.

MITBeta @ Don't Feed The Alligators August 30, 2008 at 9:05 pm

You could also invest in the Vanguard STAR fund, which only requires a $1000 initial deposit. Then when you build it up to $3000 you can transfer over to almost any other fund.

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