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The Emergency 401(k) Button

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As the coronavirus threatens to stall the U.S. economy, a relatively easy countermeasure is to hit the emergency 401(k) button: Congress should allow people to take a certain sum, say $10,000, from their retirement accounts without facing penalties or taxes.

This is a way to tap liquidity that already exists. Among nonretired adults, 54% have some kind of defined-contribution plan, such as a 401(k) or 403(b), according to a Federal Reserve report last year. Also, 33% hold an individual retirement account. For Americans overall, it represents a huge pool of money, estimated by one survey at roughly $17 trillion.

Early withdrawals generally face automatic tax withholding. Plus there’s a 10% penalty, with narrow exceptions. Congress created a new exception in December when it passed the Secure Act: Up to $5,000 can be taken out, penalty free, “in case of birth of child or adoption.” In hindsight, lawmakers should have added a provision “in case of global coronavirus pandemic.”

In the past, Washington has given increased withdrawal flexibility to victims of hurricanes and California’s wildfires. What’s needed this time is bigger, since the coronavirus pandemic is nationwide and economic idling will affect millions. But the mechanics appear relatively straightforward. Lawmakers could pass legislation saying that early distributions during a defined period won’t incur the 10% penalty. Maybe they could waive the usual income tax and withholding, too.

This idea has many advantages, compared with the talk of giving every American a federal check for $1,000—or is it up to $2,000? It provides an option for people who need the cash, without blanketing everyone. Under Washington’s current plan for a Coronavirus Basic Income, the government would take out debt to pay everyone. Further, each dollar pulled from a retirement account would cost the Treasury only a fraction of that in forgone revenue, for a multiplier effect.

Not everybody has a retirement plan, but a limited period of allowing free-and-clear withdrawals would encourage parents, brothers, uncles and so forth to act as a financial backstop to younger and less-fortunate family. That’s a much healthier dynamic than simply telling Americans to sit tight, crank up “Ride of the Valkyries,” and wait for the government helicopters dropping $100 bills.

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