Obamanomics: Penalty Free Withdrawals From Ira/401ks

[Jingthing]

For those retired here on investments and you don't want to sell your non-retirement account stocks in this down end of the market, President to be elected Obama has proposed a bit of relief. This will apply for tax year 2008 if there is a special congressional session that passes it this November, and 2009 upon Obama's election (and congress/senate passing of course).

The plan allows those even under age 59.5 to make IRA/401K withdrawals up to 15 percent/max 10K USD without any penalty. Of course the stream will still be taxable.

I may use this little break if it becomes law.

I propose that we allow every family to withdraw up to 15% from their IRA or 401(k) – up to a maximum of $10,000 – without any fine or penalty throughout 2009. This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college. - Barack Obama

Edited October 14, 2008 by Jingthing

[OriginalPoster]

For those retired here on investments and you don't want to sell your non-retirement account stocks in this down end of the market, President to be elected Obama has proposed a bit of relief. This will apply for tax year 2008 if there is a special congressional session that passes it this November, and 2009 upon Obama's election (and congress/senate passing of course).

The plan allows those even under age 59.5 to make IRA/401K withdrawals up to 15 percent/max 10K USD without any penalty. Of course the stream will still be taxable.

I may use this little break if it becomes law.

I propose that we allow every family to withdraw up to 15% from their IRA or 401(k) – up to a maximum of $10,000 – without any fine or penalty throughout 2009. This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college. - Barack Obama

Long term effect of that doesn't sound good. For a lot of people, their 401k's and IRA are the only source of income otuside of Social Security that they will have when they retire. Enrouraging them to dip into those funds now might have a nice populist ring to it, but letting people blow those savings before they reach retirement age is shortsighted. I'd rather have the government print up checks and mail them to people who are so strapped that they legitimately need to tap into their 401k plans than to enourage legions of future retirees to start draining thier primary retirment funds now.

Edited October 14, 2008 by OriginalPoster

[jdinasia]

seems to be even better for NON-retired yanks I have another 14+ years to that 59.5 year old mark!

[OriginalPoster]

seems to be even better for NON-retired yanks I have another 14+ years to that 59.5 year old mark!

That's who it's aimed at, people over 59.5 year old can already withdraw from those funds with no penalty.

I don't think that it's advisable to do it though unless you really need to, you'd be better off to leave the money the account earning interest or gap gains tax deferred for the next 14+ years if there's any way you can. Also, if you do need the cash and your money's in a 401k, under present 401k law you can "borrow" money from your 401k and you pay it back to your account over time. If your cash flow problem is temporary, that might be a better option than an outright withdrawal because over time you'll have a greater amount acruing tax deferred.

Edited October 14, 2008 by OriginalPoster

[OriginalPoster]

seems to be even better for NON-retired yanks I have another 14+ years to that 59.5 year old mark!

Another point - while under this plan you could withdraw the stated amount of money without incurring the usual 10% penalty for early withdrawals, the amount you withdraw would still be subject to income taxes and would be taxed at the same rate that ordinary income is taxed. Leave it in the account until you're retired and you don't have to pay the income tax until you're retired. That has two advanages, first you will be earning interest on the money that you did not yet pay in taxes, and second that most people you will have less ordinary income when you are retired and hence your marginal income tax rate may be lower than it is now.

Edited October 14, 2008 by OriginalPoster

[bendix]

I like Obama, but it's a terrible terrible message he's sending. In the middle of a crisis caused by people spending far more money than they can have, he is farting in the direction of a flame.

The vast majority of the American public have been shown to have the financial discipline of a spoilt teenager with a credit card and what does he propose? Give them more. Expect the sales of LCD tvs to soar.

Point of order - this is not anti-American. The Brits and others have proven similarly financially inept, if not more so.

[Jingthing]

Look, folks, its only a one or possibly two time thing (2009, maybe but probably not 2008) and meant to be an emergency measure for people that need access to those funds. The reality is people already touch those funds and pay the penalties when they feel they need them and have no better option. It is a minor tweak, it won't solve the world economic crisis and its not likely to make or break individuals either.

Of course, in general, it is a bad idea to touch your retirement accounts until you are of age to need them. But there are lots of earlier retirees with large retirement accounts that it just might be a strategic time to make an exception.

LOOPHOLE

Also note, there is a system for anyone to make early withdrawals without penalties (under age 59.5) for several years, but you have to follow strict rules and the accounting is a nightmare. These are just tools in your toolbox if you deem them to be good ideas for you personally.

http://www.retireearlyhomepage.com/wdraw59.html

. Also, if you do need the cash and your money's in a 401k, under present 401k law you can "borrow" money from your 401k and you pay it back to your account over time.

Only if you are still employed at the company you have your 401K with. My understanding with those loans is that your employment is terminated, you must repay the loan IMMEDIATELY. This isn't relevant to most expats in Thailand.

Edited October 14, 2008 by Jingthing

[OriginalPoster]

Look, folks, its only a one or possibly two time thing (2009, maybe but probably not 2008) and meant to be an emergency measure for people that need access to those funds. The reality is people already touch those funds and pay the penalties when they feel they need them and have no better option. It is a minor tweak, it won't solve the world economic crisis and its not likely to make or break individuals either.

It might be hard to repeal it or to let it expire at the end of 2009 for to do so could be portrayed as a "tax increase on the middle class" by the other side of the aisle.

This is a bad proposal, pure and simple. You have to be really blinded by Obama's aura not to see that. It's bad enough that over the last couple of decades that private pensions have all but disappeared in the in favor of 401k accounts that work out well only for people with the financial discipline to direct those accounts well, but it's downright disappointing to think that this agent of "change" sees those 401k accounts as a viable source of shortterm liquidty.

Edited October 14, 2008 by OriginalPoster

[Jingthing]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency. Millions of Americans are hurting right now and they are hitting those accounts anyway. While hitting those accounts too early is a bad idea, it beats homelessness or not being able to fix your car to go to a low wage job to eat, yes? Or thousands of other personal reasons people might make an adult choice to hit those funds. Don't even try to make this partisan political. An ideological republican would say people should have control over their money and be free to make their adult choices, win or lose.

Edited October 14, 2008 by Jingthing

[bendix]

So they can access the funds if the NEED to? Define need. Need to upgrade your car? Need the new iMac? Need to take that trip to Hawaii?

I think your faith in Joe Six-Pack's financial maturity is touching, if misguided.

[OriginalPoster]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency. Millions of Americans are hurting right now and they are hitting those accounts anyway.

Is there going to be a requirement that a person prove that they are about to lose their house, starve, or not be able to obtain medical care if they don't dip into their retirment funds? If not, it will dramatically increase the number of people dipping into their 401k regardless of whether other financial options exist.

[Jingthing]

So they can access the funds if the NEED to? Define need. Need to upgrade your car? Need the new iMac? Need to take that trip to Hawaii?

I think your faith in Joe Six-Pack's financial maturity is touching, if misguided.

You got it wrong. I don't have any faith in anybody. I do appreciate an OPTION for me personally as an adult, and I think there are other adults who appreciate that as well. And like I said, there is already on the books a totally legal LOOPHOLE for early retirees who make the adult decision to draw their IRA funds earlier than 59.5 with no penalty, this year, last year, every year.

[Jingthing]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency. Millions of Americans are hurting right now and they are hitting those accounts anyway.

Is there going to be a requirement that a person prove that they are about to lose their house, starve, or not be able to obtain medical care if they don't dip into their retirment funds? If not, it will dramatically increase the number of people dipping into their 401k regardless of whether other financial options exist.

No, of course there won't be a means test. And like I said, anyone can do this already using the LEGAL LOOPHOLE or you can pay the penalty (which most people do). I am sorry but in a real emergency with no other options, eating now is better than eating in the future.

In defense of Obama, this is just one minor point in a number of economic proposals he has made. I appreciate some people think it is a bad policy idea, it wasn't my intention to argue about whether it is good or bad policy overall. But for some individuals it may be something that they make the adult decision it is good for them to use and if it becomes law, they can make their own decision. Obama is going to be president and once he gets over his short or long honeymoon, I am sure even his most ardent current fans will have plenty to complain about his performance as he gets to take over this royal MESS.

Edited October 14, 2008 by Jingthing

[OriginalPoster]

So they can access the funds if the NEED to? Define need. Need to upgrade your car? Need the new iMac? Need to take that trip to Hawaii?

I think your faith in Joe Six-Pack's financial maturity is touching, if misguided.

You got it wrong. I don't have any faith in anybody. I do appreciate an OPTION for me personally as an adult, and I think there are other adults who appreciate that as well. And like I said, there is already on the books a totally legal LOOPHOLE for early retirees who make the adult decision to draw their IRA funds earlier than 59.5 with no penalty, this year, last year, every year.

For some reason that logic wasn't applied by progressives when the idea on the table was to make it possible for a person to direct how thier own social security funds be invested. When that came up, it was correctly judged that the averge person could not be trusted to have that OPTION as an adult. The difference this time is that your man proposed it. This proposal should concern you that Obama might not really be very progressive, that he is merely a clever manipulator of progressives.

Edited October 14, 2008 by OriginalPoster

[PeaceBlondie]

Both candidates are desperately remembering the rally call of the 1992 campaign, "It's the economy, stupid," and are falling over one another to think of band-aids and solutions for this crisis. This idea is nothing, if it is limited to $10,000. I know folks with hundreds of thusands in their 401(k) accounts, for whom 10K of cash would not make a big difference. Besides, it is only a campaign gimmick.

Federal employees who retire before age 59.5 can withdraw from the TSP program without penalty; I did that, only ten percent of my total.

Another bad point about this idea is that people might take the money out at the bottom of a bear market, such as now.

[Jingthing]

I agree, PB, it is a gimmick and has limited appeal and usefulness. But I can assure you there are some cases where the break would be used, appreciated, and be in the best interest of the person doing it.

Also, for early retirees who didn't know about the legal loophole I pointed out to make penalty free withdrawals every year, maybe some found that helpful. I still think most people are not even aware of that loophole.

Unemployment is going up in the US and for those in their 50s currently without jobs, it is going to be even harder to secure any lucrative employment. Thus I predict a wave of involuntary early retirees in their 50s. Some of them may have nice IRA accounts and could really benefit from any early withdrawal loopholes, a new temp one, or the current one which can be used for several years.

To the poster who wants to discuss restructuring social security, I think that is off topic.

Edited October 14, 2008 by Jingthing

[Tim207]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency.

As with many of these poplulist policies, the theory tends to sound good on the surface but reality is more complex. To take your reasons one at a time:

Avoid losing house: There has already been several proposals to stop people from losing their house.

Pay for medical care: There are programs in place for this already, not to mention the fact that hospitals MUST treat anyone coming through the door in emergency and generally treat even non-emergent cases regardless of financial ability.

To eat: Food stamps and other free food programs abound here.

Most of this money will go to keeping up a standard of living that they can't afford or it will be hoarded out of fear of the market.

Encouraging people to take money out of their retirement is a foolish idea, particularly at a time just AFTER the market has gone down so much. This is the WORST time to be removing that money. It would also mean that even more money will be leaving the market, thus driving down prices more.

[jdinasia]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency. Millions of Americans are hurting right now and they are hitting those accounts anyway. While hitting those accounts too early is a bad idea, it beats homelessness or not being able to fix your car to go to a low wage job to eat, yes? Or thousands of other personal reasons people might make an adult choice to hit those funds. Don't even try to make this partisan political. An ideological republican would say people should have control over their money and be free to make their adult choices, win or lose.

I concur. People are losing homes etc. The borrow against the 401k is something I did in the past when financing a home reno rather than take a second on it. Paid 7% interest but of that 7% .. 5% went back into my account and only 2% went to service the 'debt'. I actually paid myself interest and made $.

The admins of that system would loan only on a new vehicle or home related things...

(I have been in thailand for 5 years .. I don't work ... and who knows, the cash and market crunch could make pulling down some from a 401k not too bad of an idea next year, but I doubt I'd do it)

[jfchandler]

I should say...thanks to Jing for posting about this...and letting everyone know it's part of Obama's economics platform...

There certainly will need to be a lot of IFs come to pass -- if Obama gets elected, if it remains on his agenda post-election, if it gets enacted by the House and the Senate -- before anyone needs to start fretting too much about it.

Generally, I agree, it's not a good idea to encourage people to start tapping their 401K accounts for routine or day to day living expenses or luxuries like buying a fancy car, or taking trips, or such like that. And yes, I'm sure, if the door is opened, some people will choose to do stupid things like that...

However, there also could certainly be times when tapping a 401K, if it could be done without the heavy penalty that now exists and only for a short window of time, might be the best financial option. Jing mentioned some of them above...

Another for example, what if, a person was living now on their stock investments, but saw them fall in value greatly with the recent turns in the market. And...what if, they had their retirement 401K funds in more conservative, money market type investments that would have help up in value more.

Rather than locking in a big stock loss by having to sell stocks now to meet a person's ongoing living expenses, it certainly might make more sense to use funds from a 401K if it could be done without penalty and without incurring a big market loss...

[Jingthing]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency.

As with many of these poplulist policies, the theory tends to sound good on the surface but reality is more complex. To take your reasons one at a time:

Avoid losing house: There has already been several proposals to stop people from losing their house.

50 percent of the homes for sale in the LA area are foreclosures. Great programs! And so effective, timely, and widespread!

Pay for medical care: There are programs in place for this already, not to mention the fact that hospitals MUST treat anyone coming through the door in emergency and generally treat even non-emergent cases regardless of financial ability.

Most bankruptcies in the United States directly related to medical bills! Great health care access program!

To eat: Food stamps and other free food programs abound here.

Yes, Virginia, there is hunger in America. It is not Darfur, but there is hunger:

http://www.pbs.org/moyers/journal/04112008/profile4.html

Most of this money will go to keeping up a standard of living that they can't afford or it will be hoarded out of fear of the market.

Amazing how you know so much about the private money affairs of 300 million people!

Encouraging people to take money out of their retirement is a foolish idea, particularly at a time just AFTER the market has gone down so much. This is the WORST time to be removing that money. It would also mean that even more money will be leaving the market, thus driving down prices more.

It isn't a good time IF it can be helped. I agree. I guess there are still some really out of touch people who do not realize how serious and widespread this economic downturn really is.

Edited October 14, 2008 by Jingthing

[Mrjlh]

I should say...thanks to Jing for posting about this...and letting everyone know it's part of Obama's economics platform...

There certainly will need to be a lot of IFs come to pass -- if Obama gets elected, if it remains on his agenda post-election, if it gets enacted by the House and the Senate -- before anyone needs to start fretting too much about it.

"If" a frog had "wings" my granddaddy would say....

Let's remember that all the rhetoric from both parties will "only" happen if Congress agrees with them and make it law! So many candidates in the past have have great statements during their campaigning that never came about.

[Jingthing]

Let's remember that all the rhetoric from both parties will "only" happen if Congress agrees with them and make it law! So many candidates in the past have have great statements during their campaigning that never came about.

This is true, but this small item of an IRA withdrawal for one year tweak is so minor when Obama is elected I would predict it is almost certain to pass in the legislature as well. I won't entertain any crazy ideas of Obama losing. I also can't imagine why anyone would fret about this. It would be a voluntary option, an option that is really already available if you want to go for the loophole I mentioned (but that you have to do for a number of years).

Edited October 14, 2008 by Jingthing

[Tim207]

No, it is not bad if it used properly in a temporary emergency. The intended audience is a person who needs to take that money to avoid losing their house, or pay for medical care, or to eat. An emergency.

As with many of these poplulist policies, the theory tends to sound good on the surface but reality is more complex. To take your reasons one at a time:

Avoid losing house: There has already been several proposals to stop people from losing their house.

50 percent of the homes for sale in the LA are foreclosures. Great programs! And do effective, timely, and widespread!

I have no idea if your assertion about sales in LA are accurate, but I doubt it. The point is that there are other proposals by BOTH candidates that would already nullify the need for retirement money to stop forclosure. None of these proposals will help anyone until someone is elected and impliments them. This reasoning for this particular policy is made unnecessary by the other policies covering this problem.

Pay for medical care: There are programs in place for this already, not to mention the fact that hospitals MUST treat anyone coming through the door in emergency and generally treat even non-emergent cases regardless of financial ability.

Most bankruptcies in the United States directly related to medical bills! Great health care access program!

I see but I don't think you do. Bankrupcy is a process that eliminates debts with partial or no payment of them. So you want people to take part of their retirement money, which is protected in bankrupcy, to pay medical bills that they would otherwise not have to pay. If they are that far down a hole, the percentage of retirement they can take out will either not be enough or only temporarily stave off the inevitable.

To eat: Food stamps and other free food programs abound here.

Yes, Virginia, there is hunger in America. It is not Darfur, but there is hunger:

http://www.pbs.org/moyers/journal/04112008/profile4.html

And there are people living on the street when there are homless shelters available. You can't make people take hand outs. Some are to proud or to lazy to deal with the hastle.

Most of this money will go to keeping up a standard of living that they can't afford or it will be hoarded out of fear of the market.

Amazing how you know so much about the private money affairs of 300 million people!

And you think that most of the people that "need" this money do not define need as gas for the SUV, shopping at non-discount stores, and buying brand name products?

My father was a child of the depression and taught me to save money when possible. I have several friends that make more money than me and are just scraping by. They can't comprehend how I manage to spend 5 months a year in Thailand not working while they live paycheck to paycheck. I just shake my head when I see all the crap they find necessary.

Encouraging people to take money out of their retirement is a foolish idea, particularly at a time just AFTER the market has gone down so much. This is the WORST time to be removing that money. It would also mean that even more money will be leaving the market, thus driving down prices more.

It isn't a good time IF it can be helped. I agree.

Good to know we agree on that at least.

[Jingthing]

Tim, I will get in trouble for continuing with a detailed US political debate so lets just say we see things differently, but you are correct about LA. HALF for sale are NOT foreclosures. The statistic is actually 45 percent! So sorry, happy times in LA!

http://latimesblogs.latimes.com/laland/200...ly-half-of.html

[Tim207]

Tim, I will get in trouble for continuing with a detailed US political debate so lets just say we see things differently, but you are correct about LA. HALF for sale are NOT foreclosures. The statistic is actually 45 percent! So sorry, happy times in LA!

http://latimesblogs.latimes.com/laland/200...ly-half-of.html

LOL, So you admit you were wrong, I win the debate.

I can agree we see things differently and we can end it there, we agree.

[flying]

Let's remember that all the rhetoric from both parties will "only" happen if Congress agrees with them and make it law! So many candidates in the past have have great statements during their campaigning that never came about.

Yep makes me think a benevolent dictatorship may be a better way to go

[glyph]

"An ideological republican would say people should have control over their money and be free to make their adult choices, win or lose."

The problem is that there are many adults who have made bad choices financially, and allowing them to spend their retirment savings on self-made "emergencies" is a bad idea. A friend of mine - a real estate broker - wanted me to lend her $15K USD so she could weather out the storm. I refused, and her brother lent her $1000. Now, she's facing losing her home and she asked me to buy her (she mentioned that she would pay me back) several pieces of jewelry. Right now, it's more important for her to add to her jewelry collection, than to save her home. Some people are simply irresponsible financially, and there's little anyone can do about it.

[BEENTHEREDONETHAT]

It appears that some of the posters here are in a shoot the messenger mood. Jingthing was providing information about something he felt would be of interest to many americans. Don't blame him if you disagree with the message, it is not his proposal.

[andyc2006]

seems to be even better for NON-retired yanks I have another 14+ years to that 59.5 year old mark!

That's who it's aimed at, people over 59.5 year old can already withdraw from those funds with no penalty.

I don't think that it's advisable to do it though unless you really need to, you'd be better off to leave the money the account earning interest or gap gains tax deferred for the next 14+ years if there's any way you can. Also, if you do need the cash and your money's in a 401k, under present 401k law you can "borrow" money from your 401k and you pay it back to your account over time. If your cash flow problem is temporary, that might be a better option than an outright withdrawal because over time you'll have a greater amount acruing tax deferred.

Why do you say that?

If you're already living off your assets but young, with no income, this gives you a way to transfer 401/Traditional IRA money (pretax savings plan) into a Roth IRA (posttax savings plan) without paying any penalty, and paying hardly (if any) taxes on it.

Tax decisions are very specific to a situation. Plenty of times it makes sense to do the non-intuitive, even if you don't "really need to." Careful with your advice.

[andyc2006]

This is a bad proposal, pure and simple. You have to be really blinded by Obama's aura not to see that. It's bad enough that over the last couple of decades that private pensions have all but disappeared in the in favor of 401k accounts that work out well only for people with the financial discipline to direct those accounts well, but it's downright disappointing to think that this agent of "change" sees those 401k accounts as a viable source of shortterm liquidty.

Bad for whom? Who are you to judge?

I saved up buttloads of money, much of it pretax, and I'm looking for ways to avoid taxes on it. But I'm 20 years from being able to pull from my tax-deferred accounts without penalty.

This is a great idea.

Lets not forget that another Democrat (Pelosi) is talking about a "one-time" tax levy on all 401ks/IRAs, because of record deficits. If that passes, we need to find as many ways as possible to get money out of our tax-deferred savings plans, i.e., out of the hands of govt who'll just send more $ to bomb Iraq or pass another No Banker Left Behind bailout.