Employee Retirement Savings Plan Alternatives

While concerns about both job and financial security continue to float in the back of employee's minds, employers must understand how to play a role in their financial wellbeing actively. Employers should communicate to their teams the importance of continuous savings and the long-term benefits that can yield, despite potential market volatility.

The most important thing is for employees, if possible, to maintain their current long-term savings plan. Making financial/investment decisions based on short-term headlines can significantly impact their ability to meet your long-term goals. In addition to missing potential market gains, any funds that are removed from retirement accounts will also affect the benefits of compounding interest over time and potentially incur tax penalties. These implications are specific to individual situations and should be discussed with a professional.

If employees have good intentions of continued savings but are worried about having access to funds that they may need in the future, consider these three ideas:

1 - Emergency Savings Emergency Savings

Having funds specifically set aside for an emergency is an integral part of any strategy. If employees do not have 3 -6 months of living expenses in the bank, they should consider what lifestyle changes can be made to build this financial cushion. There are likely things they may have been spending less on during quarantine, including eating out, entertainment and gas. While it may be tempting to overindulge in online shopping, employees should consider reallocating these funds into a savings account.

Roth Savings2- Saving in ROTH Accounts 

A ROTH IRA is different than a traditional IRA because individuals pay taxes on the funds when they save them, as opposed to paying taxes when they are taking them out. There are several benefits of saving in a ROTH Account to be considered.

You can still use your money if you need it

Contributions can be withdrawn at any time. A Roth IRA can be a retirement plan and an emergency fund in one. This excludes an investment gains, which can be withdrawn tax-free as a qualified distribution if you are at least 59 1/2 years of age and have held the account for at least five years.

Tax benefits

The most obvious benefit of a ROTH IRA is tax-free compounding: Individuals don't have to pay taxes on any capital gains or dividends on your investments. On top of that, any qualified withdrawals made during retirement are free from income tax.

When considering a ROTH account as an option, here are two crucial questions to ask:

    • Would you like to see the tax benefits now or in retirement?
    • Do you think your tax bracket will be higher now or when you are in retirement?

Health Savings3- Saving in a Health Savings Account

If employees are eligible to enroll in a Health Savings Account (HSA) either through employer-sponsored health plans or as individuals, they can save pre-tax dollars to qualifying health care expenses. HSAs play an essential role in a strategic long-term savings plan because of the tax benefits, opportunities for growth and the flexibility to use it for qualifying expenses tax-free. 

An HSA account is essentially a savings account for medical expenses and future healthcare needs. Money is contributed to the account on a pre-tax basis, meaning you get to spend tax-free money on qualified medical expenses. Many HSA accounts can also be invested similar to a traditional IRA and you can 'self-direct' the investments.

If money is withdrawn for non-medical related withdrawals, individuals would need to pay ordinary income taxes on those funds. It is safe to assume that individuals will have enough qualifying expenses to use the funds. This assumption is based on the fact that, according to Investopedia, a 65-year-old couple retiring in 2019 could expect to spend $285,000 in healthcare and medical expenses throughout retirement.

These savings vehicles provide flexibility to help employees save for a successful future, but allows them to access the funds should a short-term need arise. Each option should be considered based on individual financial situations.

We are living in interesting times, that is for sure. No matter what, a good savings plan is diversified in nature, ensuring that the "buckets" you create offer flexibility and are part of a broader strategy. A financial advisor can help you determine what strategies are best for you. Keep saving, "future you" will be grateful you did.

Tristan Talley on June 8th, 2020

Posted by Tristan Talley

Tristan Talley is Vice President at Bukaty Financial Services – A OneDigital Company, bringing more than 17 years of financial and wealth experience. In this role, Tristan’s primary responsibilities involve helping clients connect their money to the lives they want. As a wealth management advisor, Tristan specializes in retirement income planning, estate planning and tax planning, working with all aspects of a client’s financial life to assist them in accomplishing their goals and dreams. He also provides financial education to retirement plan participants.

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