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Ask an Advisor: We Have $1.2 Million in IRAs and Only $10k in Cash. Should We Use IRA Withdrawals to Build Our Emergency Fund?


I am 64 ½ and have been retired for just over a year. I am receiving Social Security benefits, a bit early, but have not touched my nest egg except to withdraw $10,000, which I placed in a high-interest savings account as an emergency fund. Would it be wise to use part of that cash to top off my, or my wife’s IRA contribution and then continue to withdraw small amounts for the next few years to build up the emergency fund to a higher level? We have about $1.2 million between our two IRAs.

– Tom 

Congratulations on your retirement, Tom. Whether or not you should use IRA withdrawals to build up your emergency fund may depend on how reliant you’ll be on your IRAs for income moving forward. Let’s go over a few things you should consider. (And, consider speaking with a financial advisor if you have similar questions surrounding your retirement plan.)

Topping Off Your IRA contributions

First, let’s talk about whether you’re even able to make IRA contributions. You’ve been retired for a little over a year and didn’t mention any other part-time work you’ve done since then. So, it sounds like your income comes solely from Social Security and potential IRA withdrawals. If that’s the case, you won’t be able to make an IRA contribution (unless your wife is still employed and has sufficient income for you to make a spousal contribution) since IRA contributions must come from earned income.

Assuming that you can contribute, though, let’s consider the idea of withdrawing from your IRA only to put it back into your wife’s account, and then take it out again. This is most likely an unnecessary series of steps that isn’t doing anything for you. If it makes sense to withdraw from your IRA to build up your emergency fund, it stands to reason that it doesn’t make sense to withdraw from your emergency fund to put it back in your IRA. (Talk a financial advisor if you need help simplifying your own financial plan in retirement.)

Your Emergency Fund

An emergency fund can provide peace of mind to retirees.

In pre-retirement, the standard rule of thumb is to have enough cash set aside to cover three to six months’ worth of living expenses. While that may still be enough for some retirees, it’s important to note that the principal reason for the three- to six-month timeframe (loss of income) is different now that you’re retired. A loss of income doesn’t seem to be much of a concern since you appear to be living solely off your Social Security benefits. As a result, you may be able to get by with a smaller emergency fund than other retirees.

Also, consider the idea that if you can reasonably expect to live on your Social Security for the duration of your life, with no planned withdrawals from your IRA, then your IRA is already essentially one big emergency fund (though, you’ll have to plan to take RMDs later down the road). Having $10,000 in a high-yield savings account could easily be enough if you don’t plan on making many withdrawals from your IRAs.

However, if you plan to rely more on IRA withdrawals going forward you may want to consider building up your emergency fund well beyond $10,000. That’s because you’re especially exposed to what’s known as sequence risk early in retirement and having cash on hand can mitigate it. Sequence risk refers to the dangers of making withdrawals during market downturns when your portfolio is presumably worth less. If the market tanks you’ll have to liquidate more of your holdings to meet your income needs, depleting your assets faster and reducing your portfolio’s longevity.

While loss of income is the primary reason for having an emergency fund during your working years, sequence risk is one of the main reasons to have an emergency fund in retirement. Early in retirement, it may be good to have enough cash set aside to cover one year of expenses and possibly more. This protects you from having to withdraw from your accounts during a market downturn, giving them more time to recover. (A financial advisor can help you navigate sequence risk and other risks you’ll potentially face in retirement.)

Withdrawing From an IRA to Build an Emergency Fund

A husband and wife check on their retirement account and emergency fund balances.

Whether you decide you need a large or small emergency fund, also realize that you don’t necessarily have to withdraw all of that money from your IRA. You can always designate a portion of your IRA as an emergency fund and place it into the appropriate interest-bearing investments. As a practical matter, it may help to transfer a portion of your balance to a different IRA and designate that entire IRA as part of your “emergency fund” just to keep it straight. As an example, imagine that you need $50,000 to cover one year of living expenses. Maybe you keep the $10,000 in your high-yield savings account and designate $40,000 in your IRA as an additional emergency fund.

Taxes are the main sticking point, though. You’ll be taxed on your IRA withdrawal whenever you take it, whether that is now or later. Then again, the interest you earn on the money in your savings account will also be taxed along the way.

This doesn’t mean you shouldn’t withdraw money from your IRA and set it aside in your emergency fund. However, taxes are something to consider. Planning your withdrawals to minimize your tax liability over time can save you some money. (And if you need help structuring your IRA withdrawals or managing your tax liability, consider working with a financial advisor.) 

Bottom Line

Your emergency fund in retirement serves to protect you from unexpected expenses, investment losses and sequence risk. Consider the nature of your retirement income. The less secure your income is or the more you rely on investment withdrawals, the more you may want to keep in an emergency fund. Either way, simultaneously moving money in and out of your IRA each year isn’t likely to help you. 

Retirement Planning Tips

  • Calculating how much income you’ll need to generate when you stop working is a pivotal component of retirement planning. T. Rowe Price recommends starting with a target income replacement rate of 75%. This means that your retirement account withdrawals, Social Security benefits and other income sources should add up to 75% of your pre-retirement income. From there, you can adjust this percentage up or down based on your savings rate during your career, as well as your projected expenses.
  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article. Questions may be edited for clarity or length.

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