A highlight of the Secure 2.0 Act is that it will make it easier for Americans to incorporate emergency savings into retirement plans.
President Joe Biden signed several provisions aimed at increasing Americans’ financial readiness for retirement last week.
The Secure 2.0 Act of 2022 – a continuation of the Secure Act of 2019 – contains a number of fundamental changes to existing retirement account rules and certain related tax incentives. A Secure 2.0 spotlight will affect how Americans can build emergency savings into retirement plans.
Beginning in 2024, individual account plan sponsors can create “emergency savings accounts” that allow low-paid employees to make after-tax Roth contributions to a special savings account within the retirement plan, said a report from the Morgan Lewis.
Contributions to the special savings account would be capped at $2,400, and the first four withdrawals each year would be tax and penalty free. Contributions may also be eligible for an employee match if plan rules allow it, according to Fidelity.
“In addition to giving members penalty-free access to funds, an emergency savings fund can encourage plan members to save for unexpected, short-term expenses,” Fidelity said.
If you’re preparing for your retirement, consider using a personal loan to help you pay down debt at a lower interest rate, saving you money every month. You may contact Credible to speak with a loan specialist and get all your questions answered.
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Why adding emergency savings to retirement plans is important
Half of Americans said they had less than $1,000 saved in an emergency fund, and 40% of hourly job respondents said they had less than $500 in emergency savings, according to a fintech company researchthat isI.
Not having emergency savings can have both short- and long-term impacts, said Jeff Cimini, senior vice president at Voya Financial. And without a hard-day fund, people can draw on their retirement nest egg to cover unexpected expenses.
Employees who can’t cover three months or more of expenses without borrowing money are 13 times more likely to have a hardship withdrawal from their retirement plan, according to Cimini.
“Many in the retirement plan industry, including Voya, have also long viewed emergency savings as an important building block to enable individuals to manage their financial picture holistically while also being able to save for their future retirement,” said Cimini .
If you’re planning for retirement, paying off debt can put you in a better financial position, and a personal loan can help reduce your monthly expenses. You can visit Credible to speak with a personal loan specialist and get all your questions answered.
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See how you can create emergency savings
Along with this new option to build emergency savings, Americans can take these steps to create a rainy day fund, according to Achieve:
Set a goal of how much you want to save
While this will vary based on your circumstances, a good goal is to save enough to cover “six to nine months of basic living expenses in an emergency fund,” Achieve said.
Make savings part of your family budget
Including the amount you’ve carved out as your emergency savings as part of your household budget means you’re more likely to reach your goal.
Open a savings account and use it
An automatic transfer from your checking account to a savings account will help you build your emergency fund, and most banks and credit unions pay interest on savings. If your employer allows it, Achieve advises splitting your paycheck into direct deposits into your checking and savings account.
“It will help you avoid the temptation to spend your emergency savings,” Achieve said.
Try to reserve 10% of your income for savings
Building a rainy day fund takes time, and the best course of action is to imagine an emergency — like an unexpected medical bill or appliance repair — that might prompt you to use a credit card. Setting aside any amount consistently “will put you on the road to success,” Achieve said.
Remember, even the smallest amount is better than zero.
“Establishing an emergency savings fund can provide a unique measure of financial stability for you,” Achieve said. “For some people, that means enough to get by for a month and pay all the bills. For others, it means the ability to take a vacation or retire at a certain age.
If you are retired or preparing to retire, paying off debt with a personal loan can help lower your interest rate and monthly expenses. You can visit Credible to compare several personal loan lenders at once and choose the one with the best interest rate for you.
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