Suze Orman Says This Retirement Account Gives You 'Emergency Flexibility.' Here's What She Means

It's a nice option to fall back on.

Saving for emergencies is important, because you never know when life might throw you a curveball. You could wake up in the middle of the night in winter to a freezing house, or come home from work one summertime afternoon to find that your home is scorching. And let's not forget that your car could decide to stop running at any time, especially if it's an older one.

That's why it's crucial to have money in a savings account for unplanned bills. But unfortunately, many people don't have cash reserves like that. And over the past year, inflation has made it more difficult to put money into savings.

Meanwhile, it's also an important thing to save for retirement. If you don't, you might end up short on cash once your senior years roll around.

Now, there are a number of different tax-advantaged retirement plans you can use to save for the future. You could put money into a traditional IRA and get a tax break on your contributions. But a traditional IRA will have you paying taxes on the withdrawals you take during retirement.

Another option to look at is a Roth IRA. Though you won't get an upfront tax break with a Roth IRA, you'll get tax-free withdrawals as a retiree.

Financial guru Suze Orman happens to be a big fan of the Roth IRA. But it's not just because these accounts allow for tax-free retirement withdrawals. She also likes the fact that a Roth IRA can serve as your backup emergency fund.

More flexibility

In a recent blog post, Orman wasn't shy about touting Roth IRAs as an excellent savings tool. But a big reason she's a fan has to do with what she refers to as "emergency flexibility."

As Orman explains, "You can always withdraw the money you contributed to a Roth IRA without owing any tax or penalty. The only time you would be hit with tax and potentially a 10% early withdrawal penalty is if you withdraw any earnings from the account. If you make an early withdrawal from a Traditional IRA you will owe income tax, and potentially a 10% penalty."

She's right about that. The downside of saving in a tax-advantaged retirement plan is facing restrictions on when you can touch your money. Removing funds early from a traditional IRA will generally result in a 10% penalty unless you qualify for an exception (you can take a limited withdrawal, for example, to purchase a first-time home).

But Roth IRAs are far more flexible. Since you don't get a tax break on the money that goes into it, you can remove that money in a pinch without being penalized.

Should your Roth IRA be your emergency fund?

Absolutely not. While your Roth IRA could bail you out of a jam if you run out of money in your savings account, your goal should be to maintain a separate emergency fund so you don't have to tap your retirement savings prematurely. Doing so could mean facing a major shortfall later in life, which is clearly not ideal.

Not only that, but the benefit of keeping money in a Roth IRA is getting to invest it and let it grow tax-free. If you keep taking emergency withdrawals, you'll lose out on that benefit. So while Orman is right in that a Roth IRA does give you emergency flexibility, you should make every effort to avoid raiding yours before you reach retirement age.