Learn How to Begin Saving Money in Your Employer’s Emergency Savings Accounts
When it comes to financial planning, having an emergency fund is crucial. However, the sad reality is that most Americans do not have one. In fact, only about 25 percent of Americans have an emergency fund, and as few as 39 percent have saved only one month’s worth of expenses. This lack of savings can be especially challenging for lower-income employees and non-regular workers who struggle to save for anything, let alone emergencies or retirement.
Recognizing the importance of emergency savings, the SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement) was passed, including provisions for employers to help their employees establish emergency savings accounts (ESAs). Starting in 2024, these accounts will be available to employees who are not considered highly compensated, typically those making less than $155,000 annually.
The unique aspect of these ESAs is that they are linked to the employee’s retirement account but allow for penalty-free withdrawals. However, due to the complexity of the account rules, some companies have opted to create separate emergency accounts for their employees outside of their retirement plans. The goal is to make it easier for employees to save for emergencies without compromising their retirement savings.
Under the SECURE 2.0 Act, employees can withdraw up to $2,500 from their ESA. Employers have the option to set a lower withdrawal limit if they choose. Additionally, employees can also withdraw up to $1,000 annually from their retirement savings plan. Once the ESA reaches the $2,500 limit, any excess money will automatically go into the retirement account.
Employers can further support their employees’ emergency savings by matching a percentage of their paycheck and depositing it into the new emergency fund. However, any matching funds provided by employers must be put into the employee’s retirement account rather than the emergency fund. This approach ensures that employees continue to build their retirement savings while also having access to emergency funds.
To encourage participation, some employers automatically enroll employees in the ESA, allowing for up to 3 percent of their paycheck to be deposited into the account. Companies that offer separate emergency fund accounts must give their employees the option to enroll.
One of the potential drawbacks of withdrawing money from a retirement account, such as a 401(k), is the associated penalties. If an employee is under 59½ years old, they will owe a 10 percent penalty fee on their withdrawal, in addition to income taxes on the withdrawn amount. This highlights the importance of having a dedicated emergency fund separate from retirement savings.
Accessing the funds in an ESA is relatively straightforward. Employees can make withdrawals once a month, with the first four distributions being free. While a distribution fee may be required after the initial four, no proof of an emergency is necessary.
Contributing to an ESA can be automated, making it easy to build up the account over time. Employees can have a set amount of their paycheck automatically deposited into the account with each pay period. The account also accrues interest, and some institutions may even offer automatic bill pay services.
When it comes to setting savings goals, Chase recommends that everyone have three to six months’ worth of income in an emergency fund. While the $2,500 limit of an ESA is a good starting point, employees may want to save more to meet their specific needs. It’s important to keep additional emergency savings in easily accessible accounts at a bank, avoiding penalties associated with early withdrawal from accounts like certificates of deposit (CDs). Furthermore, ensure that the bank is insured by the Federal Deposit Insurance Corporation (FDIC) to protect your money.
Once you reach your desired emergency fund goal, it’s advisable to redirect your savings into accounts that offer higher interest rates. By doing so, you can maximize your savings potential and continue building a solid retirement fund.
Having an emergency fund is essential for financial security and peace of mind. If your employer offers an ESA, consider enrolling in the program or explore options for automatic deductions to your own savings account. Even if the growth is gradual, having accessible funds for emergencies will provide relief and enable you to focus on building a reliable retirement fund.
Please note that the information provided in this article is for general informational purposes only and should not be considered as financial advice. It’s always recommended to consult with a financial professional for personalized guidance.
