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It’s no secret that households with sufficient emergency savings are more the exception than the norm.
Two proposals in the Senate seek to change this. And, experts say, tackling the problem could allow workers to save more for their golden years.
“One of the best ways to protect retirement savings is to help families more effectively meet short-term emergency savings needs,” said Angela Antonelli, executive director of the Center for Retirement Initiatives. from Georgetown University.
The pandemic has shown the need to save
The Covid-19 pandemic has brought to light the many workers who were unprepared for the financial hardship that followed being suddenly without a job or income. While generous government assistance was meant to keep families afloat as the economy recovered, Americans now find themselves grappling with inflation and rising interest rates that are making both buying and more expensive loan.
The overall share of Americans who are either very comfortable (13%) or somewhat comfortable (29%) with their emergency savings fell to 42% in June from 54% two years ago, according to a recent Bankrate report.
While some companies are offering emergency savings accounts to employees, the Senate proposals come with certain parameters and are both tied to 401(k) plans.
The proposals were approved by separate committees in late June as part of this chamber’s evolving version of the so-called Secure Act 2.0. The legislation would build on the original Secure Act of 2019 by making additional changes to the US retirement system with the aim of increasing the number of savers and the amount they set aside for their post-work years. .
The first proposal considered would allow companies to automatically register their employees in emergency savings accounts, at 3% of salary, accessible at least once a month. Workers could save up to $2,500 in the account, and any overcontributions would be automatically paid into an account linked to the company’s 401(k) plan.
The other Senate proposal takes a different approach: It would allow workers to withdraw up to $1,000 from their 401(k) or individual retirement account to cover emergency expenses without having to pay the penalty. typical tax of 10% for early withdrawal if under age 59.5. .
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However, a separate account would be better of the two so people are less likely to make withdrawals from their 401(k), Antonelli said.
“It helps prevent leakage from retirement savings,” she said.
Still, for workers who have access to a 401(k) or similar work plan but aren’t participating in it, the availability of emergency funds could prompt them to enroll in their company’s retirement plan, a said Leigh Phillips, president and CEO of nonprofit SaverLife. aimed at helping households build up savings.
“One of the biggest things that keeps people from participating in long-term savings is a lack of short-term cash for emergencies,” Phillips said.
In traditional 401(k) plans, where contributions are made before tax, the penalty for withdrawing from an account comes with a 10% tax penalty if the person is under age 59.5 (unless they are respects an exception authorized by the plan).
“Having money locked away that you can’t touch is alarming to some people,” Phillips said.
This concern is addressed in state-facilitated retirement programs, which typically automatically enroll workers—those without access to a work plan—into Roth IRAs (individuals can opt out of enrollment if they wish).
Why Roth Accounts Can Give Peace of Mind
Roth accounts don’t get any upfront tax relief for contributions like traditional IRAs do, but you can usually get your contributions back at any time without an early withdrawal penalty.
The Roth structure “provides greater flexibility and more conditions that allow someone to tap into those savings if they need to,” Antonelli said.
A total of 46 states have implemented or considered legislation since 2012 to create retirement savings initiatives to reach workers without a plan at work. More than $476 million is collectively invested in these plans, according to Antonelli’s organization.
Although there are some minor differences between state-run programs, the general idea is that employees are automatically enrolled in a Roth IRA through a payroll deduction (starting at around 3% or 5%), unless they withdraw.
It’s unclear if any of the Senate’s emergency savings proposals would make it into the final version of this chamber’s Secure Act 2.0, or if an approved provision would look exactly like what was offers.
The House passed its version of Secure Act 2.0 in March. It is unclear when the Senate will be able to review its restitution. Assuming senators give their approval, differences between their legislation and the House bill would need to be resolved before a final version can be fully approved by Congress.
If this does not happen this year, the legislative process will begin again at a future Congress.