Sometimes, once you stack up all your savings dreams, it seems like there isn’t enough to fund it all. Between saving for a retirement, a future down payment, future child-related expenses, and more, the retirement account deferral and contribution limits can seem unattainable. At this point, some investors will say, “Looks like I can’t fund my Roth after all.”

However, your Roth IRA is a perfectly good place to hold some of your intermediate savings goals. In fact, contributing to a Roth IRA, even though you know you will withdraw from it before retirement, is a sound financial strategy.

Roth IRAs are more flexible than other retirement accounts. At all times and at any age, you are capable of withdrawing as much as you have contributed to a Roth IRA without tax or penalty.

If you withdraw more than you have contributed, this is called withdrawing some of the earnings portion. Withdrawals from the earnings portion are subject to a 10% early withdrawal penalty, unless you meet an exception, and are taxed, unless they are qualified distributions.

So while the earnings portion of your Roth IRA will effectively need to be saved for after age 59 1/2, your contribution basis is available for early withdrawals.

For this reason, you can contribute money to a Roth IRA that you suspect you might need to withdraw. Both intermediate savings goals where you suspect you will withdraw in the next few years and your emergency budget are good candidates for saving in your Roth IRA.

However, when the time comes to access those funds, it is worth considering if withdrawing from an alternative source would be more advantageous.

Retirement accounts have IRS contribution limits on them that restrict how much you can save in them each year. This makes it difficult to save the 15% (or more) of your take home pay that is required to fully fund your retirement.

If you have a taxable brokerage account or a checking account that can cover the expense, it is better to withdraw from those first, even if you originally suspected the money in your Roth IRA was going to cover this bill. Withdrawing from Roth because “that’s where you saved this money,” rather than withdrawing from a more advantageous source is falling prey to the fallacy known as the two-pocket theory of money.

A Roth IRA provides the dual benefits of tax-free accumulation and tax-free distributions after age 59 1/2. The long-term benefits can be significant if you leave the assets to grow.

So even though withdrawals are possible and you saved your money in the Roth IRA knowing that, you should still have the bias of using a different account to foot the bill.

As for the logistics of withdrawing money, the first step is letting your financial advisor know how much and when you would like to withdraw so that they can place the sell orders to generate the desired cash. It usually takes two business days for the trades to settle, and then the cash will be ready for your withdrawal.

At Schwab, you can withdraw funds to an outside checking account using a MoneyLink or transfer funds between your Schwab accounts.

Before or after withdrawing the funds, it is important to tell your tax preparer. An additional form (Form 8606 Part III) will be required to report the withdrawal. On that form, you’ll need to calculate the contribution basis used and/or penalty incurred.

In summary, don’t be afraid to save money in your Roth IRA even if you anticipate needing to withdraw it later. But if you can leave the money in your Roth IRA when your withdrawal arrives, then leave the money to grow tax-free and spend from elsewhere.

Photo by Serghei Savchiuc on Unsplash. Image has been cropped.