The Roth IRA is a retirement savings vehicle. But it can be much more than that if you understand the rules. Perhaps the account was initially intended as a retirement account, but the Roth IRA’s flexibility allows it to be used for financial goals other than retirement.

Before getting into the alternative uses of the Roth IRA, let’s review the basics:

• Contributions are made on an after-tax basis and can be up to $5,500 in 2014 ($6,500 for taxpayers age 50 or older), depending upon IRS limits on household AGI.
• Unlike the traditional IRA, you can withdraw your contributions at any time without taxes or penalty.
• Also unlike the traditional IRA, Roth account holders are never forced to withdraw money (traditional IRAs force required minimum distributions beginning in the year after turning 70 1/2).
• All withdrawals, including earnings, are generally tax free after you hold the account for at least 5 years and withdraw no earlier than age 59 1/2.

There are also exceptions made for the tax and penalty on early withdrawals. These exceptions, with a bit of creativity, combine to enable the 4 alternative uses of the Roth IRA.

#1 — Use the Roth IRA as an Emergency Fund

Conventional wisdom says it is smart to have 3 to 6 months of expenses in an emergency fund. But how many people have the discretionary income and discipline to put aside $20,000 or so for a rainy day?

Also, how responsible is it to earn near-zero interest in an account that may never be used? Or if the emergency occurs, what are the chances it will be a financial challenge requiring more than a few thousand bucks?

Most emergencies are going to be smallish financial challenges, such as the replacement of a dead kitchen appliance or covering an auto insurance deductible after that parking lot fender bender.

Now recall that your Roth IRA contributions can be withdrawn free of tax at any time. You can open a Roth IRA with an initial minimum purchase of $2,000 or $3,000 at most of the reputable mutual fund companies or discount brokerage firms. Now you have the emergency fund that will cover most emergencies. After you have an additional $2,000 saved, buy a fund that invests in stocks, bonds or a combination.

You now have a retirement account that also serves as an emergency fund.

#2 — Use the Roth IRA for a First-Time Home Purchase

An exception that allows for tax- and penalty-free withdrawals is for the purchase of your first home. This exception is also allowed with traditional IRAs, but the Roth IRA has greater potential for significantly higher tax-free withdrawal.

For both types of IRA, the first-time home purchase maximum withdrawal without paying taxes or penalty is $10,000. But remember the after-tax nature of the Roth IRA is such that your contributions, which have already been taxed, can be withdrawn any time without tax or penalty.

In the case of withdrawing money from the Roth IRA for a first-time home purchase the 5-year rule applies only to your earnings. The best way to explain is with an example: Let’s say the total balance in your Roth IRA is $30,000 and you’ve had the account open for 5 years. We’ll also assume that you’ve contributed $20,000 to the account during that 5 years. In this case, you could withdraw all $30,000 because the $20,000 represents your contributions and the $10,000 is an amount included in the first-time home purchase exemption.

#3 — Use the Roth IRA for Funding Education

Again, the amount of your total account value that represents your contributions can always be withdrawn free of tax or penalty. Amounts withdrawn that are beyond your contributions are penalty free if they are needed to go toward qualified higher-education expenses for you or your dependents.

Qualified education expenses include tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible educational institution, which is generally any college, university, or other post-secondary educational institution eligible to participate in the student aid programs administered by the Department of Education.

#4 — Use the Roth IRA as a Hedge Against Higher Taxes

In my recent story, Why the Traditional IRA is Dead, I explained how the central idea of pre-tax savings is to “defer” taxes now while you are presumably in a higher tax bracket now than in the retirement years, when you will withdraw them and pay the taxes at a lower rate.

But this assumes that the combination of increases in income and inflation won’t move you into a higher tax bracket by the time you retire, which is likely if you have 20 or more years to go before dipping into your nest egg or you are near retirement now and expect to live another 20 years or so.

The “put off taxes now and pay later” idea of the traditional IRA also assumes that federal income tax brackets, which are at or near historic lows now for many taxpayers, won’t go up.

You can see how it is almost foolish to use a traditional IRA for tax purposes. But the same reasoning says that the Roth IRA can be a great savings tool to use as a hedge against higher taxes. All it will take for most Americans to be in a higher tax bracket in retirement is time, inflation, pay increases, and/or the passage of new tax laws. Do you want to bet any or all of those won’t occur?

The information in this article is for discussion purposes only and does not represent tax advice or financial recommendations.