Coronavirus in Oklahoma: COVID-19 suffocates workers' ability to save for retirement

Not surprisingly, the coronavirus is suffocating many Americans’ ability to save for retirement, as millions are tapping their nest eggs to offset lost income and also contributing less to their 401(k)s or IRAs.

More than 27% of those working or recently unemployed already have taken withdrawals from their retirement accounts. And atop the 25% of households who hadn’t been contributing before the pandemic, 18% now are contributing less.

That’s according to a mid-May online survey of 1,326 U.S. adults conducted by YouGov for Bankrate.com.

“The runaway culprit is loss of income, cited nearly twice as often as the next most common reason of keeping more cash on hand,” said Greg McBride, Bankrate chief financial analyst. “This is most pronounced among younger households, who may miss out on decades of future compounding if forced to turn to their retirement savings during these trying times."

The number of Americans saving less squares up with the fact that about 20% of workers have filed for unemployment since March 13 and, according to another recent Bankrate survey, roughly 30% of households have experienced a decline in income.

Of those who are recently unemployed (since Jan. 1) and have retirement savings, half have dipped into them — or plan to, compared with 22% of those currently employed.

Some relief

Relaxed rules in the wake of the coronavirus outbreak likely factored into many Americans’ decisions to tap retirement accounts.

Among other things, the CARES (Coronavirus Aid, Relief and Economic Security) relief passage, which President Donald Trump signed into law on March 27, allows 401(k) plan participants diagnosed with or financially affected by the virus, for six months after the law took effect, to take a coronavirus-related distribution of up to $100,000.

These distributions have significant tax advantages that don’t otherwise exist, Brandon Long, an employment benefits attorney with McAfee & Taft, said in a daily Q&A with The Oklahoman.

The normal 20% federal income tax withholding can be ignored, he said. Moreover, these distributions are exempt from the 10% early withdrawal penalty, which typically applies if a participant is under age 59½.

Distributions related to COVID-19 can be repaid to the plan within three years, Long said, and the individual can recognize personal income for the related taxes over a three-year period that begins when they take the distribution — as opposed to having all of the amount included immediately in their income.

Long said the CARES Act also allows the same qualifying individuals to borrow more against their 401(k) accounts: up to the lesser of $100,000 or 100% of their vested account balance, both double the normal amounts. Generally, participants also can delay repayment of the loans by up to one year.

Cut contributions

According to the Bankrate survey, Americans are cutting back on retirement savings primarily for loss of income. But other reasons include to keep cash on hand, 33%; additional expenses, 20%; to help adult family members, 18%; and for additional debt, 17%; a decreased or eliminated 401(k) match from an employer and the higher cost of food.

Retirement contributions differ with household incomes and generation, Bankrate found.

Respondents earning less than $30,000 are nearly three times as likely as those earning $80,000 or more to not have been contributing before COVID-19 or now — 39% vs. 13%.

Meanwhile, about 20% of millennials (ages 24 to 39) and Generation Z (23 and younger) with retirement savings already have used some to replace their income since the coronavirus crisis started. That compares with 8% of Generation X (ages 40 to 55) and nearly 10% of baby boomers (ages 56 to 74).

Overall, 18% of working or recently unemployed U.S. adults are contributing less to their retirement accounts since the pandemic. The good news is 49% are contributing the same and 8% are contributing more.