An ideal way to build up your emergency savings account is to set aside money each month, specifically for that reason.
However, it’s not always possible, and we all have competing savings goals. For example, is it more important to save for retirement or save for an emergency? Well, they are both important and there are ways you can achieve both goals.
Supplemental savings programs are used as an extra way to save money to help fill any gaps in your retirement funding. They can also act as an emergency savings fund throughout your working career. With these programs, you decide how much to contribute and you can start and stop your contributions at any time. Examples of supplemental savings options include 457 Programs and IRAs.
457 Supplemental Savings Program
A 457 Program is a voluntary account in which a portion of your salary is deposited into an investment account that you manage. It is designed specifically for public sector employees. Your benefit is based on the total amount of money in your account when you leave your employer.
Emergency Savings Benefits of a 457 Program
Some 457 Programs offer the option of taking an emergency withdrawal in the event of unforeseen financial hardship. Examples of qualifying hardships include:
- Sudden and unexpected illness or accident
- Loss or damage to your property due to an accident
- Disaster, destruction, theft or other severe and unforeseeable circumstances
One of the highlights of a 457 Program is that you do not need to be a certain age to start using your account balance. It is available for you to use, penalty-free, once you leave employment regardless of your age.
Individual Retirement Accounts (IRA)
An IRA is a tax-advantaged individual retirement account. There are two IRA options:
- A Roth IRA provides tax-free income in retirement
- A Traditional IRA allows tax-deductible contributions now
Emergency Savings Benefits of a Roth IRA
The ability to withdraw contributions at any time to cover unplanned expenses make a Roth IRA appealing if you are trying to build your retirement account and your emergency savings at the same time. You can withdraw your contributions from a Roth IRA tax-free at any time, without paying a penalty. Only your investment earnings need to remain in the account until you are 59½ to avoid paying a 10% penalty and income tax.
For more information on planning for the unexpected and building your emergency savings account, check out our recent webinar – Planning for the Unexpected.