Should I take contributions out of my Roth IRA to live off of?
Take another job.  From a personal finance perspective this is the wrong reason to dip into a retirement account.  You will lose so much ground towards actually retiring.  Sure you won't be taxed, but you will be missing so much opportunity where that money won't be working for your retirement. The off-topic answer to take to the start-ups stackexchange site is:  don't quit your day job until your business plan is written out and you have an idea of where to get your startup capital. That's up to you, but I wouldn't play around with my retirement money if I was in your situation. Your earning potential during your retirement years will likely be at its nadir. Do you really want to risk being forced to be a Wal-Mart greeter when you are 80? Also, considering your earning potential now is probably at or near the peak, your opportunity cost for each hour of your life is much higher now than it will be later. So ultimately you'd be working a little harder now or a lot harder later for less money.
It doesn't matter if you aren't maxing out your IRA contributions anyway.  If you are maxing out IRA contribution and you still have extra money to deposit then yes you better have all the money inevested, but if you aren't maxing out your contribution then it doesn't really mattter where you stick your emergency savings.  But if you fall into money later you will be glad you put your emergency in a roth. Lets imagine two scenarios: 1) You make 10.4k (40% of total income) yearly contributions to a savings account that earns 1% interest for 10 years. In this scenario, you put in 104k and earned 5.89k in interest, for a total of 109.9k. 2) You make the same 10.4k yearly contribution to an index fund that earns 7% on average for 10 years. In this scenario you put in the same 104k, but earned 49.7k in interest*, for a total of 153.7k. The main advantage is option 1) has more liquidity -- you can get the money out faster. Option 2) requires time to divest any stocks / bonds. So you need enough savings to get you through that divestment period. Imagine another two scenarios where you stop earning income: 1-b) You stop working and have only your 109.9k principal amount in a 1% savings account. If you withdraw 15.6k yearly for your current cost of living, you will run through your savings in 7 years. 2-b) You stop working and have only 20k (2 years of savings) in savings that earns 1% with 153.7k in stocks that earns 7%. If you withdraw your cost of living currently at 15.6k, you will run through your investments in 15 years and your savings in 2 years, for a total of 17 years. The two years of income in savings is extremely generous for how long it starts the divestment process.  In summary, invest your money. It wasn't specified what currency we are talking about, but you can easily find access to an investment company no matter where you are in the world. Keep a small amount for a rainy day. "With a healthy income its quite possible to contribute too much into 401Ks/IRAs.  For example, if your retired today and had 3 million or so, how much more would you need?  Would an extra million materially change your life?  Would it make you happier if you invested that extra in some rental properties or perhaps a business like a sandwich or ice cream shop where you have more direct control? This kind of discussion is possible as you indicate that you have taken care of your life financially.  It seems at odds with the negative press describing the woefully condition of the standard person's finances.  These articles ignore a very simple fact:  its because of bad behavior.  You, on the contrary, have behaved well and are in the process of reaping rewards.  This is where I feel your ""mental gymnastics"" originates.   Looking to engage in the rental market is no different then buying a franchise.  You are opening a business of your own.  You'll have to educate yourself and are likely to make a few mistakes that will cause you to write checks to solve.  Your goal is to minimize those mistakes.  After all, what do you know about the rental home business?  I am guessing not much.  Educate yourself.  Read and spend some money on taking knowledgeable people out for coffee.   In the end you should understand that although a poor decision may cost you money you cannot really make a bad decision.  Lets say you do buy a rental property, things go south, you sell for a loss, etc....  In the end the ""butchers bill"" is 50K or so.  Will that materially change your life?  Probably not.  The worst case is perhaps you have to work a year or two beyond the anticipated retirement age to make up that money.  No big deal." "To answer the first part of your question: yes, I've done that!  I did even a bit more.  I once had a job that I wasn't sure I'd keep and the economy wasn't great either.  In case my next employer wouldn't let me contribute to a 401(k) from day one, and because I didn't want to underfund my retirement and be stuck with a higher tax bill - I ""front-loaded"" my 401(k) contributions to be maxed out before the end of the year.  (The contribution limits were lower than $16,500/year back then :-)) As for the reduced cash flow - you need of course a ""buffer"" account containing several months worth of living expenses to afford maxing out or ""front-loading"" 401(k) contributions.  You should be paying your bills out of such buffer account and not out of each paycheck.  As for the reduced cash flow - I think large-scale 401(k)/IRA contributions can crowd out other long-term saving  priorities such as saving for a house down payment and the trade-off between them is a real concern.  (If they're crowding out basic and discretionary consumer expenses, that's a totally different kind of problem, which you don't seem to have, which is great :-)) So about the trade-off between large-scale 401(k) contributions and saving for the down payment.  I'd say maxing out 401(k) can foster the savings culture that will eventually pay its dividends.  If, after several years of maxing out your 401(k) you decide that saving for the house is the top priority, you'll see money flow to the money-market account marked for the down payment at a substantial monthly rate, thanks to that savings culture. As for the increasing future earnings - no.  Most people I've known for a long time, if they saved 20% when they made $20K/year, they continued to save 20% or more when they later made $100K/year.  People who spent the entire paycheck while making $50K/year, always say, if only I got a raise to $60K/year, I'd save a few thousand.  But they eventually graduate to $100K/year and still spend the entire paycheck.  It's all about your savings culture. On the second part of your question - yes, Roth is a great tool, especially if you believe that the future tax rates will be higher (to fix the long-term budget deficits).  So, contributing to 401(k) to maximize the match, then max out Roth, as others suggested, is a great advice.  After you've done that, see what else you can do: more 401(k), saving for the house, etc." You should simply withdraw the excess contributions by April 15. You have until October 15 if you go through the extra step of filing an amended tax return.  https://investor.vanguard.com/ira/excess-contribution It unnecessary for you to pay the 6% penalty. You should wait until you can estimate your 2016 accurately before making your 2016 contribution. If your income is too high for the Roth IRA, you might instead pursue the backdoor Roth IRA strategy:  https://www.bogleheads.org/wiki/Backdoor_Roth_IRA First thing to note is that contributions (i.e. the total of all the amounts that you directly contributed into Roth IRA at any point in time) to a Roth IRA can be withdrawn at any time, without needing any reason, without any tax or penalty. Early withdrawal (early because you are under 59.5) of earnings, on the other hand, will incur tax and penalty. (I didn't go into withdrawal of conversions as those are a little more complex.) When you withdraw, contributions come out first, so as long as you don't withdraw more than the amount of past contributions, you won't have any tax or penalty. And if it's not going to have tax, it doesn't really matter if you do it this year or next year. If you need to dip into the earnings, however, then maybe it would be better to do this year so it will be taxed at lower rates. Well this is not the best situation.  Sorry to your friend. First off ROTHs are out, you need earned income.  Secondly, I don't think the focus should be on retirement planning until there is again an earned income.  Thirdly, this person is just in a bad spot. Lets assume that you can find some really good mutual funds, that consistently return 10% per year.  At best this person can only pull out 10K per year without touching principle.  At that income level, taxes are not much of a concern; not as much as surviving.  If this person knows anything about investing, they know funds don't work like this.  They could be down 5%, down 5%, up ~40% in three years to give an average of 10% return.  Which of course further complicates matters.     This person (IMO) should seek to start a different career.  One that can cater to any long term issues this person has with pain/disability.  The money could be used toward training/education in order to get money flowing again.  That is not to say the full amount should be used for a BA in Russian Folk Literature, but some minimum training to get a career that starts earning real money. You're right, of course - But that's not something you would ever want to do *accidentally*.   Five years from now, the OP may well decide to convert some of his traditional funds to Roth; for now, even though Roth was his original intent, that would mean a tax bloodbath come next April.   As an aside, the biggest reason (for most people) to have Roth funds **isn't** because you expect to make more (inflation - or more importantly, tax-code - adjusted) in retirement than now.  If that were the case, the entire concept would be almost worthless - Who the heck makes more *after* retiring than *before*?  The best reason to have substantial Roth funds in your retirement portfolio is the way that Social Security is taxed.  If you can keep your AGI under $25k (note that includes half of your SS benefits, but since the standard deduction is roughly $10k, those more-or-less cancel each other out), you don't pay a dime in taxes on your SSI.  So, if you have a solid budget, take your yearly expenses, subtract out $25k, and that's what you should (sustainably) have in Roth funds.  The remaining $25k is what you should have in traditional funds. Putting money into a Roth IRA or 401(k) will save you money if your taxes this year will be lower than your taxes in retirement. See also the Wikipedia retirement-savings matrix. "If you have wage income that is reported on a W2 form, you can contribute the maximum of your wages, what you can afford, or $5500 in a Roth IRA.   One advantage of this is that the nominal amounts you contribute can always be removed without tax consequences, so a Roth IRA can be a deep emergency fund (i.e., if the choice is $2000 in cash as emergency fund or $2000 in cash in a 2015 Roth IRA contribution, choice 2 gives you more flexibility and optimistic upside at the risk of not being able to draw on interest/gains until you retire or claim losses on your tax return).  If you let April 15 2016 pass by without making a Roth IRA contribution, you lose the 2015 limit forever.  If you are presently a student and partially employed, you are most likely in the lowest marginal tax rate you will be in for decades, which utilizes the Roth tax game effectively.   If you're estimating ""a few hundred"", then what you pick as an investment is going to be less important than making the contributions.  That is, you can pick any mutual fund that strikes your fancy and be prepared to gain or lose, call it $50/year (or pick a single stock and be prepared to lose it all).  At some point, you need to understand your emotions around volatility, and the only tuition for this school is taking a loss and having the presence of mind to examine any panic responses you may have.  No reason not to learn this on ""a few hundred"".  While it's not ideal to have losses in a Roth, ""a few hundred"" is not consequential in the long run.   If you're not prepared at this time in your life for the possibility of losing it all (or will need the money within a year or few, as your edit suggests), keep it in cash and try to reduce your expenses to contribute more.  Can you contribute another $100?  You will have more money at the end of the year than investment choice will likely return." You are mistaken about a Roth IRA. You can take out your contributions at any time with no penalty as long as you don't touch the gains. Also, if the money has been in for 5 years you can withdraw for a first time home purchase. Your concerns about locking up the money are troublesome. You need discipline to save for retirement. That is a known massive expense you will have and it takes a LONG time of saving up to prepare. Be sure to account for the taxes you may owe on the winnings before you start spending the money. Before you sink the money into a down payment on a house, make sure you have several (preferrably) six months of living expenses in savings. If you don't have investment experience, steer away from individual stocks. Invest in index funds with low expense ratios and don't actively trade. If he moves his 401K to a Roth all in one go, all the money will be considered income for the year he moves it, and he will have to pay taxes on that income.  If he keeps it in his 401K or rolls it into a traditional IRA, he will only pay taxes on the money as he withdraws it. Bottom line, converting to Roth is almost certainly a bad idea. There are a few things to consider. The answers others gave here are correct, but I'll offer some reasons you may not want to roll to an IRA: "I think it would be worth it for you to look into something called a ""Self-directed IRA"" before you make any decisions. Sometimes the costs can be a little higher, but you may find the flexibility worth it. Basically, instead of being limited to a small set of mutual funds from which to choose, having the money in a self-directed IRA would let you branch out into real estate, gold, or other vehicles that aren't part of the usual 401K landscape. And count me as another vote for not taking the cash. MrChrister is right, there are plenty of other ways to pay that off without the penalty." "I humbly disagree with #2. the use of Roth or pre-tax IRA depends on your circumstance. With no match in the 401(k), I'd start with an IRA. If you have more than $5k to put in, then some 401(k) would be needed.  Edit - to add detail on Roth decision. I was invited to write a guest article ""Roth IRAs and your retirement income"" some time ago. In it, I discuss the large amount of pretax savings it takes to generate the income to put you in a high bracket in retirement. This analysis leads me to believe the risk of paying tax now only to find tHat you are in a lower bracket upon retiring is far greater than the opposite. I think if there were any generalization (I hate rules of thumb, they are utterly pick-apartable) to be made, it's that if you are in the 15% bracket or lower, go Roth. As your income puts you into 25%, go pretax. I believe this would apply to the bulk of investors, 80%+."