Obama to propose penalty-free IRA and 401(k) withdrawals

[sabra]

http://blogs.usatoday.com/onpolitics/2008/10/obama-to-propos.html

The presidential contenders continue to offer ideas about how to respond to the nation's financial problems and a weak economy. According to excerpts from a speech that Democratic nominee Barack Obama will deliver this afternoon in Toledo, he will propose allowing penalty-free withdrawals from IRAs and 401(k) accounts:

"I welcome Sen. McCain's proposal to waive the rules that currently force our seniors to withdraw from their 401(k)s even when the market is bad. I think that's a good idea, but I think we need to do even more. Since so many Americans will be struggling to pay the bills over the next year, 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.


According to Obama's campaign, he will also propose giving businesses "a new American jobs tax credit for each new employee they hire here in the United States over the next two years."

[Hope And Change]

1. K & R!

[Barack_America]

2. That makes sense. nt

[NightWatcher]

3. might that cause several funds to flop?

I know people who have not withdrawn only because of the penalties. If everyone is able to take out up to 10k, wont they all?

Wont that cause the rest of the fund to be hit hard? I think that the threats of penalties are the only thing that is keping some of the funds afloat.

I am no economic student, but that doesnt seem like a good idea to me.

[writes3000]

7. Doesn't it depend if it's a LOAN versus a permanent withdrawal? nt

[ellacott]

8. You make good point

That's one of the reason I haven't taken any of my money out.

[NightWatcher]

13. people have already used their homes as ATM's and taken everything out

if they take out of their retirement, they wont have anything left.


(homes as ATM's is a ripoff of Thom Hartmann- great metaphor)

[AllentownJake]

19. We are of inning one of this crisis

When it is over the world is going to look entirely different and the current system is going to have to be retooled alot.

Keeping people in their houses and off Government welfare rolls inflating more debt and inflation (if you can't borrow you print) is an interim step till other economic measures can be enacted.

[AllentownJake]

11. 10,000 won't kill the funds

If you allowed them to take everything out it would. People are moving their investment choices to safer fund choices and even the money market accounts anyway so the funds heavily and moderately based on growth are taking a massive hit regardless.

[ellacott]

4. Wow

I've been thinking about doing that to pay off my credit cards. I wasn't sure because I didn't want to pay the penalty. I also don't have a lot in it and wasn't sure is taking anything out would be a mistake when I retire.

[MtUpWithWngsAsEgles]

9. Loans

You can also take a loan from your 401k.

[ellacott]

22. Yes, I've thought about that also.

[FloriTexan]

30. Loans are subject to you're employer's rules...

I had loan out against my 401K when I was forced to file for bankruptcy due to medical bills and a job loss in the family. My bankruptcy attorney said I should include the 401k loan even though I told him my employer said that if I ever did that then I wouldn't be able to get another loan from them. I really wanted to pay it back but Lawyer said if that was BS and if that happened to call him. Well, he was wrong and he backtracked when I called to tell him they wouldn't reloan me money. Now I cannot get a loan from my 401K and the only way I can get to that money is to quit and pay a hefty penalty. I would love to be able to take a loan again from my 401K. It really stinks because its all my money anyway. I have stopped contributing to my 401K because of the economy and because we can't get to those funds. Will start again later when things are better, but I think its better off earning 1% than losing 10-20%. Still contributing to husband's plan though as its much smaller and he's not vested.

If I can bail out these crooked bankers then there should be away to get to those funds if there is no other option.

[ellacott]

39. Oh my, I'm sorry that happend to you

On my job you can default on 2 loans but I'm not sure about bankruptcy.

It's awful that your lawyer gave you bad advice.

[MtUpWithWngsAsEgles]

42. Wow

It is subject to yor employer's rules. My employer does not have sucha rule. Thank God.

[FloriTexan]

44. What sucks even worse...

I work for a law firm who handles bankruptcy. I was told they couldn't help me and had to go hire my own lawyer and when I do and get bad advice. Also, since then, I've seen my firm help out several other people with legal matters on a pro bono basis. So much for 10 years of dedicated service!!! :argh:

[ellacott]

47. That is so unfair

I hate unfairness.

[nichomachus]

26. Don't

Don't take anything out unless there is a gun to your head. You will regret it later.

[MtUpWithWngsAsEgles]

43. deleted

[writes3000]

5. Yes!!! If I understand it, it means most average Americans will understand it!!

AWESOME!

McCain's going to shit his pants when he hears about this. He wishes he had this plan to offer.

[davepc]

6. that could cause a run on the funds, which will spike the Dow downward

The mutual funds etc will have to fire sale the stocks to raise the cash to make the payouts.

[AllentownJake]

15. They already are having that

Most IRA and 401(k) funds have a high grade bond and money market account. People are already making transfers. Have you tried to get anyone on the phone from your 401(k) company in the past week?

[Rabrrrrrr]

17. Not with a limit of $10,000 - not even close.

Plus, it'll likely be a small minority of people who take advantage of it.

I think this is a wonderful idea. Much better than giving government money hand over fist to corporations and whatnot.

[Democat]

10. He should NEVER say that McCain has a "good idea"!

Other than that, this looks like a race to the bottom between McCain and Obama - which one can propose a bigger give away?

[tyne]

12. This is a horrible idea....

Horrible. I can't believe he's proposing this. Short term gain...long term consequences.

[AllentownJake]

16. taking money out of baseball cards

and putting it into people's pockets to spend on necessisties.

I don't believe in Equities that don't pay dividends. They are baseball cards.

[populistdriven]

23. If someone has a foreclosure isnt this far more devastating than having your 401k drop by 10K?

The difference is stark between taking a hit that is planned (retirement) and something that is forced on you (foreclosure)

[nichomachus]

29. Only if the $10,000 will stave off foreclosure permanently

The problem would only magnify if you were foreclosed on anyway -- after taking the money out. Then, you're screwed two ways. Most times, foreclosure is caused by numerous factors and an infusion of $10,000 won't prevent it -- merely delay it.

[TornadoTN]

36. That's why they need to work with the banks and use this as a "bargaining chip"

If someone is able to dip into their 401k penalty free up to $10,000 and use it to stave off foreclosure, than the banks needs to be ordered by the government to negotiate new terms with this in mind to either drop their rate, shave off part of the loan, or settle it for an agreed upon price.

[populistdriven]

37. BINGO!

(sorry for yelling)

[TornadoTN]

40. Further, this would be a grand-slam for the people for bailing out the banks

It would show that we are indeed going to get something back from all of those tax dollars that are going to bail these guys out. Honestly, I would take it a step further and use profits from the bailed out companies to pay back taxpayers to some extent. Those "stimulus" checks that we got not too long ago, financed by the Chinese would pale in comparison if our government actually gave us something back for our efforts in this bailout.

[lumberjack_jeff]

14. This is good.

It saves families who must make emergency withdrawals from their retirements $1500.

I've always seen mine as both a retirement and a rainy day fund, and it's sure as hell raining.

[1776Forever]

18. I am with you! It makes sense to me to help our middle class right now for a short time period.

Until we can get back on our feet it would help!

[elkston]

20. This is an AWESOME idea. How many sat by and left their 401Ks alone because

they didn't want to take the withdrawl penalty?

...and setting an upper bound of $10,000 and limiting the waiver's duration to 1 year demonstrates that the proposal is a temporary boost, not a seismic shift.

[TheCoxwain]

21. Honestly folks .. This is either a romour or a BAD BAD idea

we need people to save ..

The penalties are there to discourage people from raiding their nest eggs ...

Retirement accounts arent meant to fund short term cash flow problems ...


This seems like stunt to me .. Obama is smarter than this ...

[ellacott]

24. It's part of his rescue plan

http://obama.3cdn.net/009ff9aad4fd7f3acf_58l3mvzb2.pdf

[elkston]

25. The limit is $10,000 and those that REALLY have no other choice ...

would welcome the temporary relief.

[creature of habit]

27. it will allow people to help themselves

and not be penalized - if Big O's tax plan is implemented this should be a good match I think. People need to pay car, and credit payments before they get too far behind to ever catch up.

[TornadoTN]

32. I agree - but we need some kind of protections built in to keep this from being used improperly

I think that it should be geared towards people who are hurting right now - those that can't afford the house payment and are in jeopardy of losing their homes or those in other serious financial situations. How we go about doing this is certainly up for debate.

However, I can just see people using this as an opportunity to go on a shopping spree and not helping fix the underlying financial messes that they find themselves in. I also have some reservations about that kind of money coming out of the market (10k isn't a vast amount of money, but compounded across the population it adds up quickly).

[mrreowwr_kittty]

33. That's the thing, people are going to be raiding their 401ks,

Whether or not all these amateur financial experts on this thread think it's a good idea or not. Not sticking them with a penalty means they will take LESS out of them than if there was one.

[LonelyLRLiberal]

48. You're right. I don't think people will take the money out to "shop."

Give people credit for some intelligence. They can look at their 401k's and see that the value has gone down due to the stock market crash, so taking up to $10k out would have to be for serious reasons. I know lots of people who have done it. I hope people do not do it as a last-ditch effort to pay credit cards, though. They should consider bankruptcy first because their retirement accounts can be protected in bankruptcy.

[TornadoTN]

28. I'm a bit startled by this as well - I think there are better options on this same idea

I believe that people who have gotten into trouble financially should have something along these lines to use as a bargaining line with banks before they are foreclosed upon. If you are able to withdraw $10,000 from your 401k without penalty to go to saving your home - the banks should be able to meet you halfway there as well.

But in a larger sense as it sounds like this is being pitched, it's a bad idea. As you said, people need to save and right now is a critical time for that. Those of us who have the means and opportunity to do so, need to be looking heavily at this - especially since we have lost so much with the market in the past year.

[mrreowwr_kittty]

31. We need people to be making enough money to save.

People have been raiding their 401ks and IRAs for the past 2 years, since this financial crisis began. You can't get blood from a turnip and you can't save what you don't have because the cost of housing, food, fuel, and health care have gone up. And what are you supposed to do if you lose your job? Starve?

[stevietheman]

41. But we should remember that consumer spending is a huge part of this economy,

and if that goes too soft, a lot more will be lost than we've recently been seeing.

[TornadoTN]

46. Yes, it pays a huge part of this economy - but I don't believe the 10k should be used for spending

At least discretionary spending. I like the plan if it is for a qualifying event, such as foreclosure or other debts that are sapping families. I would even go further and say that if a person withdraws from their 401k to stave off foreclosure or debt, then the banks (which we just bailed out) should be forced to negotiate in good faith with that person and give concessions or incentives to the lendee for doing so. Cut rates, reduced principle, etc.

If we are able to solve the massive amount of debt that families are saddled with, more money is going to be able to be freed up for discretionary spending.

[sandnsea]

45. People are losing their jobs, their INCOME

They should pay a penalty because they DID SAVE?? Gads.

[Ganja Ninja]

34. It's about time.

These accounts are a ripoff. Never mind the fact that the stock markets are rigged against the small investor, the fees these companies charge to run 401 K accounts are criminal.

[npincus]

35. WOW

[Missouri Girl]

38. I'm certainly no expert nor an economist,

But, with the limitation of one year and $10k, this seems to be a way to let folks help themselves. Yes, we need to save more, but most folks can take out the whole thing if they declare bankruptcy, as I understand it. But, at that point, it's too late, the damage to everyone is done.

Not all retirement accounts allow for loans. My employers' plan does not unless foreclosure on home is commenced or life saving medical treatment is necessary.

However, just to make a point, in my office last week, two employees had their desks broken into and money stolen from them. Security believes it was one of our co-workers. Folks are getting desperate. Why not give them an option to save themselves? Some idiots will abuse this and take a cruise, sure. But, should everyone be punished for a few stupid folks? I say no - let's help folks out.

[Democat]

49. Wow, did the market rocket up after this Obama speech?

Maybe Wall Street likes the idea?