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During the coronavirus pandemic, retirement savers appear to be taking advantage of loose rules regarding 401(k) withdrawals.
According to Vanguard’s latest analysis of customer data, a typical 401(k) investor withdraws $12,000 from their account in the form of a “coronavirus-related distribution.”
This number represents the average withdrawal amount, in other words, the amount in the middle of all withdrawal amounts.
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Coronavirus-related distribution is a new retirement withdrawal method, which was enacted in March by the Federal CARES Act to help individuals who are short of funds during the economic downturn.
Vanguard’s analysis stated that approximately 4.5% of Vanguard 401(k) investors had a coronavirus distribution between March and September, indicating that few participants used the remedy.
However, according to CNBC’s analysis of Vanguard data released in the summer, this is equivalent to nearly 187,000 investors, which suggests that the coronavirus can be distributed to approximately 4.2 million 401(k) customers.
Company data show that the withdrawal rate more than doubled by the end of May, when less than 2% of Vanguard 401(k) investors used the withdrawal mechanism.
This shows that as the economic recession continues, more and more people are turning to the CARES Act safety valve, and other temporary economic relief measures provided by the law (such as one-time stimulus checks and increased unemployment benefits) have ended.
The CARES Act allows investors to withdraw up to $100,000 from 401(k) plans, individual retirement accounts and other account types in the form of coronavirus-related distributions before December 30. Investors do not have to pay taxes for early withdrawal of pension funds, and they can also pay income tax flexibly.
Since May, the typical withdrawal amount has increased slightly, from approximately $10,400 to $12,000.
According to an earlier Vanguard analysis, in May, the typical investor withdrew more than half of his 401(k) savings in the form of the coronavirus.