When the CARES act was signed in March, it integrated $2.2 trillion into the United State’s economy. It also lifted the 10% tax penalty from early 401(k) and 403(b) withdrawals. Having this withdrawal penalty lifted gave reason for concern from retirement plan providers. However, to our dismay few have actually taken advantage of the waived penalty. It seems as though plan holders aim to avoid further financial complications, and who can blame them. No one wants to be stuck with an ugly bill from the IRS over a withdrawal that was unnecessary in the first place.
Retirement Withdrawals Are Subject to Federal Taxation
According to IRS.gov, funds withdrawn from a retirement plan may avoid the 10% tax, however, those funds are still subject to federal taxes as it’s considered regular income. In this case, is withdrawal worth it? Millions of plan holders must have decided, “No.” Seeing that very few took advantage of the waived early withdrawal penalty provided by the CARES act.
Retirement Plan Holders Were Too Quick to Withdraw
It’s truly amazing how much a $10,000 nest egg can grow for a young investor. That $10k can grow into over $100,000 over the course of about 40 years. That is some serious play money. When the pandemic hit, many retirement plan holders threw caution to the wind and withdrew. While the 10% tax was waived, that doesn’t mean the money can return as quickly as it was taken away.
It is understandable much fear circulated as the stock market endured historical highs and lows. However, leaning on fear rather than fact and math could have led to unprecedented dents in retirement plans. Around 1.3 million plan participants withdrew from Fidelity workplace saving plans throughout the months of April to October.
Withdraw Your Emotions, Not Your Funds
Retirement plan holders have until December to withdraw without the 10% penalty. Are they? Seeing as there has been an increase to contributions to workplace savings plans in the third quarter, the answer is, “probably not.” This information provided by Fidelity gives us reason to believe retirement plan holders are staying true to their financial plan. According to Fidelity’s feedback, the average 401(k) balance increased to about $109,600 by the end of September. This is a 5% jump compared to the second quarter. Not only that, but these numbers are 4% higher than they were in 2019.
Retirement plans have rules and guidelines set in place for a reason. Throughout a plan holder’s working years, their retirement plan is meant to act as a safety net and side cash for their later years. While the 2020 pandemic has hit the economy with a baseball bat, plan holders are sticking to their plans and maintaining faith in economic recovery. It is easy to become wrapped up in the volatility of the market. However, a strong retirement account is vital for the futures of many, and they appear to be quite aware of it.