How is an ESA different from a standard savings account?

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Devin Miller
April 24, 2023

Saving more money is a consistent goal for many of us, but in an environment of rising inflation and economic uncertainty, it’s more important than ever. According to recent research, 91% of Americans are saving for something this year, whether that’s for an emergency or to pay off debt.

The most effective way to save money is to take advantage of one of the many types of savings accounts  available to consumers — or savers — today.

What are the different types of savings accounts?

Savings accounts are typically bucketed into two general categories: short-term savings accounts and long-term savings accounts. Like the names indicate, these accounts are intended for either short-term needs (such as saving up for a down payment on a car or a house, or creating a financial buffer in case of an emergency), or for long-term needs (such as saving for a child’s college tuition or for retirement from work).

Both short-term and long-term savings accounts are critical for financial health and stability. Without a long-term savings plan, retiring from work may never become achievable. And without short-term savings, paying for emergency expenditures or meeting any immediate cash needs will mean tapping into other savings accounts — usually long-term savings accounts — which undermines savings goals and can delay retirement plans by months or even years.

Types of long-term savings accounts

Long-term savings accounts come in a few different varieties and flavors, many of which are outside of the account-holder’s control. That said, there are long-term savings accounts that savers can open without an employer’s involvement. Here are some of the main long-term savings accounts you might see in the market.

Traditional 401(k) 

A traditional 401(k) plan is a retirement account that allows employees to make pre-tax payroll contributions into a fund, which is then invested for further growth. Employees can typically pick and choose (to some extent) how their 401(k) money gets invested, and employers can offer to match contributions to a 401(k) plan. 

The money in a 401(k) is taxed upon withdrawal at retirement.

Roth 401(k)

A Roth 401(k) is  similar to a traditional 401(k), but the employee contributions are made after taxes are withheld, as opposed to before. All gains are also tax-free. When the retiree withdraws money from a Roth 401(k), the transaction is therefore tax-free.

403(b) plans

A 403(b) plan is a retirement savings account similar to a 401(k), but the company offering the plan is a non-profit organization — a hospital, a school, or a church. Employees make tax-deductible paycheck contributions, and employers can match those funds up to a certain level. Money in a 403(b) plan is taxed when it’s withdrawn.

Individual retirement account (IRA)

An individual retirement account, or IRA, is another type of retirement account, but this type of account is opened by an individual instead of sponsored by an employer. There are more options available in an IRA than in a 401(k), but employers can’t match contributions, and the overall contribution limit for a 401(k) is higher than for an IRA.

With an IRA, the deposits or contributions made each year are tax-deductible, and the saver pays taxes when funds are withdrawn.

You can open and contribute to both a 401(k) and an IRA if you decide that you’d like to save more for retirement than your employer’s 401(k) will permit.

Roth IRA

In a Roth IRA, the deposits or contributions are not tax-deductible, but the saver does not have to pay taxes when they withdraw the contributions or gains at retirement.

529 plan

Also known as a Qualified Tuition Program, these plans are intended to help pay for tuition and other educational expenses, such as books. Like with some retirement plans, account-holders can choose how to invest their contributions to some extent.

Types of short-term savings accounts

Short-term savings accounts are structured to help savers cover both planned and unplanned expenses today or in the near future. They are a critical part of any financial plan because they provide an additional monetary cushion outside of long-term savings accounts — which really should remain untouched in order to capture their greatest value.

Emergency savings accounts (ESAs)

An emergency savings account, or ESA, is a savings account that is dedicated for emergency use, which can be sponsored by an employer. This means that employees at companies offering ESAs can set up an account, contribute to it regularly through payroll deductions, and possibly even take advantage of matching or sign-up bonuses offered by the employers.

The money in these accounts is intended to be easy to access for immediate and emergency use, and with employer-sponsored ESAs, setup is also typically very easy. New legislation around ESAs allows employers to automatically enroll employees in an ESA, too.

Not every ESA program is built exactly the same. Here are some variables to consider when comparing and contrasting different ESA offerings (including a personal self-administered ESA).

Features and benefits     Personal (self-created) ESA      SecureSave     Other employer-sponsored ESAs
Deposits deducted directly from paycheck No Yes Maybe
Employers have the option to match contributions No Yes Maybe
Linked to a 401(k) account No No No
Cap on total savings potential No No Maybe
Money is immediately available when needed Yes Yes Maybe
There could be tax implications to withdrawing money for use No No Maybe
Simple to set up No Yes Maybe
Can be transferred from employer to employee N/A Yes Maybe

Health savings accounts (HSAs)

A health savings account or HSA is intended to help save money for certain qualified medical expenses, including for certain dental and vision procedures. These accounts allow the saver to set aside pre-tax payroll dollars into the account. The money is not taxed on withdrawal if it’s used for a qualified expense, making an HSA a great option for paying for any known or unknown healthcare expenses.

Money saved in an HSA belongs to the recipient and does not have to be spent in the same calendar year. It can roll over into the next year.

Flexible spending accounts (FSAs)

A flexible spending account or FSA is an employer-sponsored account that allows employees to set aside up to $3,050 to pay for certain healthcare costs, such as deductibles or copayments, prescription medications, medical equipment, and more. 

Like an HSA, the money in an FSA is not taxed when it’s deposited or when it’s withdrawn (if it’s being used for an approved expense). But unlike with an HSA, the funds in an FSA will expire and therefore must be used within the calendar year; it typically does not roll over to the next year. 

Employers can offer one of two options for using the money in an FSA: Adding a two-and-a-half month “grace period” to the term, or carrying over up to $610 to the next year (as of 2023).

Standard or traditional savings accounts

A standard or traditional savings account is an account that individuals can set up at a bank, credit union, or other financial institution. These accounts typically accrue some interest, although it’s usually minimal compared to the growth opportunities available in other investment accounts. As of April 2023, the best rate you can get from a high-yield nationally available savings account is about 5.0% annual percentage yield.

While account-holders can set up automatic withdrawals from their checking into their savings account to help grow their savings, these accounts are not employer-sponsored, and contributing to the account is entirely up to the individual. Many banking institutions will also place limits around the number of free withdrawals that can be made from a savings account in a month; if the user exceeds the number of free withdrawals, the bank applies a fee to subsequent withdrawals.

How is an ESA different from other types of savings accounts?

There are a few specific attributes that make ESAs a bit different from other categories of savings accounts.

Like an HSA, but unlike a traditional savings account, ESAs can be sponsored by an employer. This means that employees can get their desired savings amount deducted directly from their paychecks for automatic recurring deductions, building the nest egg one pay period at a time.

Employers can also offer incentives to the employees who take advantage of the sponsored ESA. Those incentives might include a signup bonus for initially enrolling in the program, matching a certain amount of contributions per paycheck, or providing an additional match when a milestone is met.

Recent legislation passed in the SECURE 2.0 Act allows employers to link an ESA to a workplace retirement plan; any contributions made above and beyond the ESA plan cap will be redirected into the retirement fund. 

Money placed into an out-of-plan ESA is easily and immediately accessible when the account-holder might need it. It’s available specifically for emergencies, so savers can expect to receive their funds within one business day of requesting them. An in-plan ESA, by contrast, could take as long as 30 days to transfer the funds.

And also unlike a retirement account, the amount of savings in an ESA is protected: all the money placed into the account will be available when the employee eventually needs it. Most of these plans are FDIC-insured, and some may even be able to accrue interest, just like a traditional savings account.

What kind of savings account should you open?

Ultimately, the kind of savings account you should open is going to depend on your savings goal. If you’re like the 42% of Americans who are trying to save for an emergency, then the special features and benefits of an ESA can make that a particularly apt choice for you.

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Devin Miller

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