Few Americans Withdrew From Their 401(k) Due to Coronavirus
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briefing for Thursday, November 5th. I'm J.R. Whelan for The Wall Street Journal. The CARES Act passed at the start of the pandemic temporarily allowed Americans to tap into their retirement accounts without penalty to cover a job loss or economic hardship. Turned out, relatively few wound up doing that.
So we see this sort of blurring of lines between the fact that this money is meant to be set aside for retirement for the future and the need for people to access some kind of emergency savings.
Our retirement reporter, Ann Turgason, will explain why many people likely chose not to dip into their retirement savings and the long-term effects potentially facing people who did. That's after the break.
At the start of the pandemic, Americans who were hurting financially were given the opportunity to tap into their retirement savings without penalty under the Federal CARES Act. But most people didn't.
What did the CARES Act change about penalty-free 401(k) withdrawals during the pandemic?
Our retirement reporter Anne Turgason is here to explain why. Anne, thanks for joining us. Sure. So a lot of people's personal finances took a major hit last spring. Why didn't they use money readily available to them?
So first of all, this year, because of the coronavirus crisis, Congress passed a law in the end of March that lets people take up $200,000 out of their retirement accounts penalty free. It expires at the end of this year. So, you know, given that we were seeing about, you know, four or five, 6% of people taking money out of their 401ks, which is you know, a significant number, but it's, again, it's not what the industry had initially feared, which was, you know, much higher rates. I think that reflects the fact that, you know, that we have sort of inequalities in the workplace where people who are losing their jobs tend to be people who have lower wages, and a lot of those people don't have access to 401ks.
So there's sort of this inequality in the workplace where, you know, people who have 401ks tend to be higher paid. Those people tend to generally still have jobs, so they haven't needed to tap their 401ks. The people who really kind of need to tap some emergency savings and might actually want to tap some retirement savings actually, by and large, probably don't have a lot of retirement savings and don't have access to 401ks.
Now, the rules allowing for penalty-free withdrawals, they've been loosened before, right?
I traced this back over time, and it seems to date from Hurricane Katrina, where that's the first time I found an instance where Congress basically said to people who were affected by the hurricane in that region, that they could take up to $100,000 out of their retirement accounts penalty-free. And then, you know, subsequently, when we've had significant natural disasters, Congress has resurrected that. So it's, you know, become a much more frequent occurrence.
And many people still tap their retirement or 401k for non-hardship reasons.
There's sort of a complex patchwork of rules governing early withdrawals from 401ks and IRAs. And actually, there are differences between the two. But in general, people take money out of these accounts early. Like, for example, with 401ks, when people leave, a high percentage of people actually cash out their accounts, particularly small accounts, people very... frequently decide, you know what, there's only a couple thousand dollars in that account. I'm going to take it all out. I'm going to pay the taxes. I'll pay a penalty. But, you know, I'll have the money and I can go buy something that I want to buy.
You know, we hear from a lot of experts, and we've talked about it here on Your Money Briefing, that people should think long and hard before withdrawing early from their retirement. Maybe they took that advice to heart.
the reality is that what we're seeing here is that a lot of people who have 401ks have retained their jobs and even if a spouse maybe suffered a bout of unemployment um maybe they've been able to ride out the storm you know on one paycheck and so they haven't had to resort in large numbers to tapping these accounts i mean certainly you know like i said we're getting double or triple
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