Managed Accounting

Retirement 101: Roth Emergency Savings Accounts within Retirement Accounts

Posted on May 8, 2024

By Beth Mickelson

May 22, 2024

To relieve the burden on Americans with little to no savings, the government recently instituted an optional savings provision into existing 401(k) plans. Many Americans, especially those laid off during COVID and the recession, withdrew from their retirement accounts to make ends meet. Early withdrawals from retirement accounts often mean a sizable tax penalty, as well as reduced growth for any savings left in the account. To help these individuals create a safety net while leaving their retirement savings untouched, the SECURE Act in 2022 created an additional early-withdrawal feature: Roth emergency savings accounts.

The SECURE Act 2.0

The SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, was originally introduced in 2019, with additions and modifications in 2022. This most recent part of the SECURE Act includes several different possible modifications to 401(k) and other employer-sponsored retirement accounts. Each one has the goal of helping low- to middle-income Americans meet their financial and retirement goals.

These include provisions for:

  • Catch-up contributions for older workers
  • Retirement provisions for long-term, part-time (LTPT) employees
  • Automatic plan enrollment for new hires
  • Emergency savings accounts within retirement accounts
  • Matching 401(k) contributions with qualified student loan payments (QSLPs)
  • Adjustments to the age minimums for required minimum distributions (RMDs)

In this article, we will look at the emergency savings account features in the SECURE Act of 2022.

Roth Emergency Savings Accounts: An In-Depth Review

Who can have an ESA account?
Roth emergency savings accounts are an optional provision in the SECURE Act. Employers are not required to offer plans that include this provision. If the employer does choose to offer retirement plans that include ESA accounts, these plans are available for most employees. Any employee who is eligible for the retirement plan is eligible for an ESA account. The only exception is any employees designated as “highly compensated”, which for 2024 would be a salary of $150,000 per year.

How does the ESA account work?
The ESA essentially functions as a mini-Roth account within the 401(k) or other employer-sponsored retirement plan. Like a Roth, contributions to Roth emergency savings accounts go in after taxes, and can be withdrawn tax-free.

However, there are two main differences. First, the money can be withdrawn at any time of financial hardship without tax or penalty – there is no time or age limit for when the money can be withdrawn. The other main difference is the size. The maximum size for an ESA account is $2,500, although the employer or plan administrator can set a lower maximum value.

Employers contribute up to a 3% match on employee contributions to the ESA, although the employer match funds go into the regular 401(k) and not the ESA account.

What are the contribution limits?
Although the account has a maximum balance, this is not the same as the total contribution the employee can make to the ESA in a year. Roth emergency savings accounts cannot get to more than $2,500, but if the employee makes withdrawals during the year, they may contribute more money to bring the account back up to its maximum value.

For example: Marissa contributes $2,500 to her ESA account, then stops making contributions. Three months later, her car breaks down and she chooses to withdraw $1,750 from her account to cover the repairs. If she makes no further withdrawals, she can contribute an additional $1,750 to the account during the year to bring it back to a balance of $2,500.

If Marissa has set up automatic contributions to the account from her paycheck and the account hits $2,500, her employer has two choices. Further contributions to the ESA account will either be redirected to a separate Roth account within Marissa’s retirement plan, or must be stopped entirely.

ESA contributions are also subject to the total contribution limit for the retirement account. For most 401(k) accounts, this means a limit of $23,000 for 2024. If Marissa contributes $2,500 to her ESA, she will be limited to regular 401(k) contributions of $20,500 for the year.

The $2,500 ESA account limit is fixed. Unlike other savings vehicles like an HSA or IRA, which allow a certain amount of contributions per year with an increasing balance, the ESA is capped at a total limit of $2,500. To come back to Marissa, let’s suppose she fully funds her ESA account in 2024 and makes no withdrawals. She will not be able to contribute any money to her ESA account in 2025 or subsequent years unless she first makes a withdrawal.

There is no minimum required contribution to an ESA account to maintain it.

What is the growth rate?
Roth emergency savings accounts may not be subject to the same rate of growth as the rest of the 401(k) investment. The ESA money is invested differently than the money in the rest of the account, as it needs to be easy to withdraw at any time. While a typical 401(k) account is generally a long-term investment mix of stocks and bonds, the ESA money will be invested in something much more liquid such as a high-yield savings account or money market account. Depending on the stock market at the time, one side or the other of the account may show a faster rate of growth.

How are withdrawals treated?
Employees must be allowed at least one withdrawal per month from their ESA account. The money is treated as a Roth withdrawal, and so is tax-free. There is no IRS penalty for withdrawing money. Employers and plan administrators may create an administrative fee for withdrawals from the account after the first four withdrawals – the account isn’t meant to be a revolving door savings account.

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Emergency Withdrawals vs. the Roth ESA

There is a separate provision for emergency 401(k) withdrawals that is different from the ESA legislation. This earlier provision allows employees in financial hardship to make an emergency withdrawal of up to $1,000 straight from their 401(k) account. This is considered a “last resort” and must be justified by a condition of “immediate and heavy financial need” by the employer and the plan administrator.

Employees can self-certify in writing that they have an “immediate and heavy” need. This has two provisions:

  • The expense is unforeseen and unavoidable. This could be medical bills, a foreclosure or eviction notice, major necessary home repairs, or funeral costs.
  • The employee has exhausted other financing options, such as liquidating assets, employee pay without optional deductions, insurance payouts, plan loans, or reasonable commercial loans

If it is an approved withdrawal, it is not subject to IRS penalties, but it will be counted as taxable income to the employee for the year. Since this sort of emergency withdrawal is directly from the 401(k) and not an after-tax Roth account, it is subject to tax. Roth emergency savings accounts can help employees in financial hardship avoid the extra taxes and penalties involved in direct 401(k) plan withdrawals.

Effects for Employers

Like other SECURE Act provisions that include employer matching, ESA accounts will add slightly to the plan costs. Since employee contributions to the ESA are eligible for a 3% employer match, employers may contribute slightly more to the account in matches than they might with a standard retirement account match.

An employer with more college-age employees or employees with young families might choose to offer an ESA account. This would tend to increase employee loyalty and sense of well-being. On the other hand, the benefit is much smaller than other SECURE Act provisions, and would not be as much of a draw as student loan matching or other larger benefits. If the company’s demographics don’t lend themselves to ESA accounts, the added cost of maintaining the plan option might not be worth it.

Employers who provide a 401(k) plan with an ESA should provide financial education to employees that demonstrate the benefits of maintaining an ESA over other emergency financial measures such as a credit card. Having an unexpected expense paid for in full saves on future interest payments. It also creates a better mental health environment without the worry of making payments.

FAQs About Roth Emergency Savings Accounts

How does the employee demonstrate financial hardship to justify withdrawals?
The employee can self-certify in writing that they are in financial hardship. Since the ESA functions as a Roth account, there is no penalty or tax associated with withdrawals from the account. However, if the employee goes on to request a direct hardship withdrawal from the retirement account, this comes with more scrutiny.

The ESA account essentially functions as a high-yield savings account or money market account within the 401(k). These types of accounts would be easy for an employee to set up outside the retirement account if they want to have a larger emergency savings account or make frequent withdrawals from the account. Employees should be offered financial guidance on setting up the account to ensure they understand that the account is purely for an emergency and not for general savings and spending.

Employers and plan administrators do have the authority to investigate employees who make excessive withdrawals from their ESA accounts. If they suspect, for example, that an employee may be making deposits to the ESA solely to get an employer match, then immediately withdrawing funds, this may be cause for investigation and employee discipline.

How is the ESA money treated for terminated employees?
Treatment of this money generally depends on the amount involved and any amount that is not vested. Questions about specific circumstances should be directed to an accountant or CFO.

If the balance of the ESA account is less than any cash out balance for the account, it is generally cashed out and mailed to the employee as a check. If the 401(k) is fully vested and there is a Roth option available, the ESA money will go into a non-ESA Roth account.


Navigating these new regulations and optimizing your savings strategy can be complex. This is where the expertise of KDG’s accountants and tax team becomes invaluable. We are equipped to provide personalized guidance to ensure that your retirement planning aligns with both your immediate financial needs and long-term goals. Reach out to our skilled professionals today, and take a proactive step towards a more secure financial future. Whether you’re setting up a new Roth emergency savings accounts or optimizing existing retirement savings, KDG’s team is ready to assist you every step of the way.

Steve Solt headshot

Beth is the accounting team lead at KDG. With over 20 years of experience managing and directing accounting departments for a variety of organizations, Beth brings a wealth of expertise. Among them: a leading nonprofit organization, a $12 million restaurant franchise, and an international manufacturer.

Want to learn more? Book a meeting with us today!

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