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Updated: 10:58 a.m. Wednesday, Feb. 20, 2013 | Posted: 1:19 p.m. Friday, Aug. 3, 2012

A Roth IRA can be an ideal rainy day saving account

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ClarkHoward.com and The Clark Howard Show have more advice to help keep you out harm's way financially.

By Clark Howard


Are you prepared for a rainy day? For more and more Americans, losing a job is more like gale force winds and a thunderstorm, not just rain.

As a general rule, about a third of people don't have money for the next minute if they're not working. Some people make too little for anything else to be an alternative. But for most of us, it's a question of have we been setting saving money as a priority? Unfortunately, too many can't or don't.

Two-thirds of people when laid off have to pretty quickly raid their 401(k) plan to live on, according to a study from Transamerica Center for Retirement Studies. People in their 40s and 50s are at greatest risk. They end up with about $2,000 left in their retirement accounts on average -- basically nothing -- according to what I read in The Sun Sentinel.

The crazy thing is that since the stock market fell apart a few years ago, the average person's 401(k) has about 40% more in it now than before the market tanked. So people understand it's important to save for retirement, but then they get waylaid by losing a job.

The odds you'll lose your job or that the company you work for will go bust are so great in today's environment. So you really need to save on two tracks: one for retirement and another for a rainy day.

My thing has been, why not save as much as you can in a Roth IRA -- up to $5,500 per year ($6,500 for those age 50 or older)? Under the law, you can pull out all your contributions tax free and penalty free. Earnings, however, must remain in the account until you're at least 591/2.

So this makes a Roth a much better emergency source than a 401(k) where you face taxes and penalties of 40% if you need to touch the money too early.

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