It helps to have a rainy-day fund in times of economic uncertainty or when an unexpected issue arises at home.
With that in mind, lawmakers included several emergency savings provisions in a bipartisan retirement security package known as SECURE 2.0 that was signed into law in December as part of a year-end spending bill.
Notably, starting in 2024, SECURE 2.0 allows employers to offer participants an emergency savings account as part of their retirement plan. Participants can be automatically enrolled at up to 3% of their pay — with the ability to opt out — and after-tax contributions are capped at $2,500. Also, participants must be allowed to take at least one withdrawal per month, and the first four withdrawals per year cannot be subject to fees. The emergency savings account may be invested in cash, interest bearing deposit accounts and principal preservation accounts, and there is a fiduciary safe harbor for automatic enrollment.
Contributions to emergency savings accounts must be eligible for the same matching contributions that apply for elective deferrals, but the employer matching contributions are made to the retirement plan instead of the emergency savings account.
Another provision allows a participant to make one penalty-free withdrawal from their retirement account of up to $1,000 per year for "unforeseeable or immediate financial needs relating to personal or family emergency expenses." The withdrawal may be repaid within three years and only one withdrawal per three-year repayment period is permitted if the first withdrawal has not been repaid.
Timothy Flacke, co-founder and executive director at Commonwealth, a non-profit that aims to build financial security and opportunity for financially vulnerable people through innovation and partnerships, said the pandemic highlighted how crucial emergency savings are.
While it's important to think about long-term financial security, the thing that keeps most Americans up at night is what's going to happen next week, next month, or sometimes tomorrow, he said. "If you have more of a cushion than you're less likely to tap into something long term," Mr. Flacke added. "Our goals around retirement saving, hard as they already are as a society, are even harder when people aren't set up to manage the near-term crises."