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Getting back on the right financial track

Jun 1, 2021
Empower Insights

Why some employees used the CARES Act to take an early withdrawal in 2020 — and what they can do to keep saving toward their goals

Since the COVID-19 outbreak began in February 2020, many American employees have faced layoffs, furloughs or pay cuts as businesses have scaled back or shut down. More than four in 10 say they or someone in their household experienced job or wage loss in the first eight months of the pandemic.1 As a result, a significant segment of the population has struggled to cover essential expenses like rent, monthly bills and healthcare costs.

The federal government has taken measures to help ease the financial burden of American workers, including issuing three stimulus checks to taxpayers whose income fell below a certain threshold. The first of these checks was issued in spring of 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which also boosted unemployment benefits and offered forgivable loans to small businesses.

In addition, the CARES Act allowed individuals under the age of 59½ to withdraw as much as $100,000 from their retirement account without paying the 10% penalty normally levied against early withdrawals. While some employees who took advantage of the early withdrawal allowance used the money to pay for trips or make major purchases, most used it to cover basic needs or pay off debts.

As the economy shows signs of recovering in 2021 and beyond, employees who have made CARES Act retirement account withdrawals face a host of tax implications over the next few years. These workers may benefit from professional advice as they work to restore their retirement savings.

Most employees see early withdrawals as a last resort

In general, Americans are hesitant to tap into their retirement savings before they retire. A July 2020 survey conducted by the Harris Poll on behalf of Empower Retirement found that most employees would consider several other options before resorting to taking money out of their retirement accounts.

More than a third of respondents (36%) who hadn't had to cope with COVID-related financial challenges said, if they needed access to additional funds, their first step would be to reduce spending. A fifth (20%) said they would start by dipping into their savings or emergency fund, 13% said they would defer a student loan payment and 12% said they would sell something of value.

Bar graph - Actions respondents would take as a first step if they needed to access money. Reduce Spending 36%. Dip into savings 20%.

When it came to retirement savings, this group indicated more hesitancy. Just 12% said their first step would be to stop contributing to their retirement savings, while only 8% said they would first take money out of their workplace retirement savings accounts.

Bar graph  And on the topic of retirement. 12% would stop contributing to retirement savings

Nearly three in 10 respondents (29%) said they would only consider early retirement withdrawals as a last resort — about the same percentage who said they would consider maxing out their credit cards.

Bar graph. 29% said they would only consider early retirement withdrawals as a last resort

Many workers were already finding creative ways to reduce their spending that left their retirement accounts untouched. For example, one respondent, a 39-year-old IT sales consultant in Indiana, had refinanced his mortgage to take advantage of a lower interest rate and lower his monthly payments. In addition, his family decided to put off most home improvement projects and order food from restaurants less often.

Why some employees withdrew early

Given employees' general reluctance to withdraw retirement money during their working years, it may not be surprising that most Americans did not take early withdrawals in 2020, despite the lack of penalty for doing so. Just 4.4% of eligible participants in an Empower plan completed CARES Act withdrawals last year.

Still, that figure represents more than 500,000 CARES withdrawals. When that number is added to the number of employees in non-Empower plans who withdrew money under the CARES Act provisions in 2020, the total is in the millions.2

According to a new survey conducted by the Harris Poll on behalf of Empower Retirement, people who took early distributions spent them on a variety of expenses with essential expenses topping the list. More than a third of early withdrawers (36%) spent their funds on basic needs like food and rent, while nearly the same proportion (35%) used the money they withdrew to pay off debt. A slightly smaller percentage (31%) put the money in their savings account, and just under a quarter (23%) used it to create or add to an emergency fund.

Graphic - How Americans spent CARES Act distributions.  (36%) spent their funds on basic needs like food and rent, while nearly the same proportion (35%) used the money they withdrew to pay off debt. A slightly smaller percentage (31%) put the money in their savings account, and just under a quarter (23%) used it to create or add to an emergency fund.

A smaller but still significant percentage of employees who withdrew money from their accounts used it to pay for a trip, make a major purchase or help buy a house.

Younger respondents — those aged 18-34 — were more likely than others to withdraw retirement funds that they then put toward their savings. Older respondents, meanwhile, were more likely to use the distributions to pay off debt.

The importance of professional guidance

Employees who took early withdrawals from their retirement accounts, although numerous, remain outliers in the bigger picture. A strong majority of American employees — 70%, according to Empower data — have responded to the pandemic by spending less and saving more. Empower also found that a third of those surveyed have become more likely to work with financial professionals than they were before the pandemic, indicating they are putting renewed emphasis on achieving savings goals.

Graphic. So what are Americans doing with their finances in 2021?

Employees who took advantage of the CARES Act to withdraw from their retirement account in 2020 may also benefit from professional guidance to ensure their retirement savings are on track, as well as to navigate the tax issues around their withdrawals.

While the CARES Act did away with the 10% withdrawal penalty, all withdrawals made last year will still be taxed as regular income. However, early withdrawers can lower their tax bill by spreading the payment over three years, since only one third of the taxes on early withdrawals is due on 2020 returns.

The CARES act also allows early withdrawers to avoid tax consequences and restore their retirement savings by repaying the amount they took from their accounts, either all at once or over the next three years. Those who do so must file IRS Form 8915-E, which is generally for disaster-related distributions.

Most people who took early distributions in 2020 did so as a last resort. Seeking the help of a financial or tax professional in 2021 may help them avoid further financial hardship and allow them to get back on track to achieving their goals.



Start planning for your future with an Empower Investment Account

1 "Economic Fallout from COVID-19 Continues to Hit Lower-Income Americans the Hardest," Pew Research Center, September 24, 2020.

2 "Few Workers Take Advantage of COVID-19 Rules for 401(k) Plan Withdrawals," CNBC, November 16, 2020.

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