Hurricane Sandy has taught people from New York and New Jersey that not only is it crucial to have an emergency fund, but it is also important to save money in a few liquid, and often tax advantaged, emergency funds for different purposes. Being an avid saver, here are some savings accounts I am considering using for 2013. Surprisingly, some of these accounts are usually not thought as emergency accounts, but there are!
Disaster Fund
Hurricane Sandy and the weeklong power outage that followed it has taught all its victims that cash is king. When disaster strikes, ATMs and credit card machines do not work and banks can be closed for days. I plan to have enough cash (a few hundred dollars) to cover basic food and gas for a few days. And unlike any of the other savings accounts, I will keep this disaster fund available in hard cash at home.
Health savings account (HSA)
According to the IRS, a health savings account (HSA) is a tax-exempt trust or custodial account to pay or reimburse certain medical expenses, in conjuction with a high deductible health plan (HDHP). While I always saved my estimated medical costs in a FSA, an advantage of the HSA is that it rolls over year over year and is portable. Essentially, HSA is a like an IRA for medical expenses, combining the best features of Traditional and Roth IRA. The maximum contribution for 2013 is $6,450 per family, reduced by any employer contributions. In case I do not use it for emergency, out of pocket medical costs, the HSA still makes for a great investment vehicle because of its dual tax advantages.
Limited FSA
Every year, one person in the family springs a dental cavity and we have to dip into out of pocket funds. In addition to a HSA, I will be saving a modest amount in a limited FSA, which does offer the pre tax payroll contribution benefits. This would be for my vision expenses (contact lens, solution etc.), which are fairly steady, and dental expenses not covered in full by my insurance plan. Although there is some talk of repealing the "use it or lose it" feature of FSAs, it is perhaps unlikely to take effect in 2013.
General Emergency Fund
It would be nice to keep some cash equivalents on hand for general emergencies that are not medical in nature, like household repairs like a burst water heater or non working appliance, helping out a family member, or other unforeseen needs. Since my 20s, I have followed the 50-30-20 savings plan, which has ensured I have enough to cover living expenses for at least six months. Since I like the money to be liquid, but not necessarily in cash, my general emergency fund is in a cash equivalent account, such as money market account at an online bank that provides some interest income.
401(k) Retirement Plan
After Hurricane Sandy, IRS relaxed verification requirements for hardship distributions and loans from retirement accounts. Although there are several drawbacks to taking a 401(k) hardship withdrawal (10% penalty for people under age 59.5 years) or loan (due within 60 days of losing a job, or subject to both income tax on distribution, plus the 10% penalty), I like to view my 401(k) as a lender of last resort. Hence, this is another emergency fund I would not neglect to contribute to, since withdrawal limits are quite high. For 2013, the maximum annual limit for 401(k) contributions set by IRS is $17,500 (higher for older workers).
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