Should You Withdraw From Your 401(k) During the Economic Crisis?
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Should you consider withdrawing from your 401(k) to cover immediate bills during the economic crisis?
Here's your money briefing for Friday, June 5th. I'm J.R. Whalen for The Wall Street Journal. For a lot of people, the recent $1,200 stimulus check and another one that could come later on this year aren't enough to keep them afloat. That's prompting many to make a tough decision. Should they tap into their retirement savings early to help pay the bills? Lawmakers are making it easier to do.
For lawmakers, this is a quick source of cash for a lot of people at little cost to governments in the form of greater deficits. You know, it's not like the government is handing this money to people. It's allowing people to take money that's already theirs.
But there are tradeoffs in withdrawing money that was earmarked for retirement. Coming up, Wall Street Journal reporter Ann Tergesen will discuss the risks and share some best practices for replenishing any retirement money that you take out.
There's a big question facing many these days. Should I tap into my retirement funds early to make ends meet?
How many people have used relaxed 401(k) withdrawal rules since the new legislation was passed?
Wall Street Journal reporter Anne Turgason is with us to discuss the pros and cons. So Anne, do we know how many people have taken advantage of looser rules governing withdrawals?
It's hard to know in the U.S. because we have a very decentralized system and the 401k record keepers are the ones who sort of, you know, know that data. But the big ones that I've spoken to are saying that so far, you know, somewhere in the participants have taken these withdrawals, you know, and that's only since March 27th and actually probably even more recent because a lot of 401k plans have been adding this feature only more recently. So it's a significant number, I believe, you know, given the short amount of time.
This seems like a good idea, especially considering the current economic crisis. But withdrawing from retirement savings early, it serves a changing work culture that's been going on for a long time.
In the US, we've always given people some access to their retirement savings for specific reasons. And people who have access to 401k loans, some 20% of people actually take those loans. So there are a lot of people who use their 401ks and get access to the money early under certain circumstances.
What are the historical reasons Americans already tap retirement accounts early?
There are people who argue that it's appropriate to give people access to this money. I mean, for one thing, people don't have a lot in emergency savings and they certainly don't have the significant amounts that they might need during the current crisis. The premise that people are going to be working for 40 years to fund a 30-year retirement is an increasingly outmoded one. I think we've seen, you know, certainly since the early 1990s, we've seen people stay in the workforce longer. You know, with the sort of demise or fading out of defined benefit pension plans, people have greater responsibility for funding their own retirements. So and then people have greater longevity. They have better health at older ages and they want to work.
So there's a combination of things going on that are propelling people to stay in the labor force longer. And so the thinking is that maybe, you know, people need access to some of this money earlier. For example, if they're switching careers, they might you know, they might need to take a break to kind of retool.
So in the U.S., what are the rules for making withdrawals from your retirement account for those affected by the coronavirus?
What specific 2020 rules let people withdraw or borrow more from 401(k)s and IRAs?
Right. So for this year, for the year 2020, Congress enacted legislation that lets people take up to $100,000 from these accounts. Now, if it's a traditional 401k or IRA, you still have to pay income tax on your withdrawal. That obligation doesn't go away, but you're able to spread the tax out over three years if you want to. You're able to repay the amount. And they waive the 10% early withdrawal penalty that normally applies when people take money out before reaching age 59 and a half. So that's for withdrawals. They also have sort of expanded the loan limits allowed. So in the past, the standard amount is that people are allowed to take up to $50,000 or half their account balance, whichever is smaller, in the form of a loan.
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Chapters
7 chapters
1
Should you consider withdrawing from your 401(k) to cover immediate bills during the economic crisis?
0:05–1:06
2
How many people have used relaxed 401(k) withdrawal rules since the new legislation was passed?
1:06–2:20
3
What are the historical reasons Americans already tap retirement accounts early?
2:20–3:20
4
What specific 2020 rules let people withdraw or borrow more from 401(k)s and IRAs?
3:20–4:49
5
Why do lawmakers support loosening retirement withdrawal rules during a crisis?
4:49–7:44
6
What are the long-term risks and behavioral concerns of making early withdrawals?
7:44–7:52
7
How can you realistically replenish retirement funds after taking emergency withdrawals?
7:52–7:53
Speakers
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