Emergency withdrawals from retirement accounts have increased in the last five years, which caused concern in Congress. While 401ks and IRAs are intended to provide future financial security, due to a lack of short-term savings, many individuals treat their retirement accounts like they would an emergency fund. Hardship withdrawals are costly as they reduce nest eggs, are taxed as income, and often incur tax penalties. There are exceptions when the IRS will waive the tax penalty, but the money withdrawn will still be taxed as income and will no longer be invested toward future retirement goals.
A Bankrate survey showed that only 44% of U.S. adults could pay $1000 from their savings in the event of an emergency. The remaining 56% admitted they would have to borrow money or use a credit card to cover emergency car repairs or medical bills. Congress saw the connection between today’s emergencies impacting future financial security and created the Secure 2.0 Act of 2022. The law aimed to “broaden access to workplace savings plans and expand incentives for savers to contribute to retirement accounts”.
Starting this year, employers can enroll workers who contribute to a retirement account in a PLESA, or pension-linked emergency savings account. A PLESA is a short-term savings account within a contribution plan. Employees who contribute to a retirement account don’t have to opt in to a PLESA, but they should seriously consider it. These accounts don’t require a minimum contribution, have no annual limit, and withdrawals from the accounts are not taxed.