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It’s no secret that households with enough emergency savings are more exceptional than the norm.
Two proposals in the Senate aim to change that. And, experts say, solving the problem could save workers more for their golden years.
“One of the best ways to protect retirement savings is to help families get through an urgent savings need,” said Angela Antonelli, executive director of the Georgetown University Retirement Initiative Center. more effectively in the short term.
The Covid-19 pandemic has enlightened many workers, who were unprepared for the financial struggles that ensued because of the sudden lack of work and income. While generous government grants are aimed at keeping families afloat as the economy grows, Americans are currently facing rising inflation and interest rates that are making both purchases and borrowings slow. become more expensive.
The overall percentage 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 survey. Recent Bank statements.
While Some companies are offering emergency savings accounts For employees, Senate proposals come with certain parameters, and both are linked to 401(k) plans.
Suggestion approved in separate committees in late June as part of that department’s development version of the so-called Privacy Act 2.0. The legislation will build on the original Privacy Act of 2019 by adding changes to the US pension system in an effort to improve the ranking of savers and how much they spend in the years after work.
The first proposal under consideration would allow companies to automatically enroll their employees in an emergency savings account, with a salary of 3%, that can be accessed at least once per month. Workers will be able to save up to $2,500 in the account, and any excess contributions will automatically go to a linked 401(k) plan account at the company.
Another Senate proposal takes a different approach: It would allow workers to withdraw up to $1,000 from their individual retirement accounts or 401(k) to cover emergency expenses without having to pay the typical 10% tax penalty for early withdrawals if they are under 59. .
However, a separate account would be preferable of the two so that people are less likely to withdraw money from their 401(k), Antonelli said.
“It helps prevent leakage from retirement savings,” she said.
However, for workers who have access to a 401(k) plan or a similar workplace but are not participating, having an emergency fund available can motivate them to enroll in their retirement plan. His company, Leigh Phillips, president and chief executive officer of SaverLife, a nonprofit organization says is focused on helping households build savings.
“One of the big things that deters people from engaging in long-term savings is the lack of short-term liquidity for emergencies,” Phillips said.
In traditional 401(k) plans, where contributions are made before taxes, the penalty for withdrawing from the account comes with a 10% tax penalty if the person is under 59½ (unless they meet an exception). rate allowed by the program).
“Having locked up money that you can’t touch is alarming to some people,” Phillips said.
That concern is addressed in state-facilitated retirement plans, which often automatically enroll workers – who do not have access to a workplace plan – into a Roth IRA (individuals with can opt out if they wish).
Roth accounts don’t have the upfront tax breaks on contributions like traditional IRAs do, but you can usually claim your contributions back at any time without penalty for early withdrawal.
The Roth structure “offers more flexibility and more terms allowing someone to tap into those savings if they need to,” Antonelli said.
Overall, 46 states have implemented or considered legislation since 2012 to create retirement savings initiatives to reach workers without a workplace plan. More than $476 million is collectively invested through these plans, according to Antonelli’s organization.
While there are some slight differences between state-run programs, the general idea is that employees are automatically enrolled in a Roth IRA through a payroll deduction (starting around 3% or 5%) unless they opt out.
It is uncertain whether either of the Senate’s two emergency savings proposals made it into the final version of the House’s Privacy Act 2.0, or whether an approved provision would be exactly the same as what was approved. recommended or not.
The House passed the Safety Act version 2.0 in March. It is uncertain when the Senate will be able to review its demo. Assuming the senators give their approval, the discrepancy between their legislation and the House bill will need to be resolved before a final version can be fully passed by Congress.
If it doesn’t happen this year, the legislative process will begin again in a future Congress.