McCain & Obama Propose IRA & 401(k) Rule Changes

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With the recent cratering of the stock market, both Presidential nominees have proposed changes to IRA and 401(k)s that would allow for both early withdrawals, up to certain limits, and suspension of the required minimum distribution rules. Jeremy at GenXFinance hated the idea but I think offering the option, especially since we are headed towards certain stagflation (inflation for the trailing 12 months before August 2008 was a staggering 5.9% and unemployment was rising). People are going to be strapped. Offering the option of the lesser of two evils is better than forcing people to take drastic measures.

Here are the proposals:

McCain: “Temporarily suspend mandatory annual withdrawals. Current rules require investors to start selling stocks at age 70½. Allow savers who are younger than 59½ to withdraw up to $50,000 at the lowest tax rate of 10 percent in 2008 and 2009.”

Obama: “Temporarily suspend mandatory annual withdrawals from Individual Retirement Accounts and 401(k)s. Current rules require investors to start selling stocks at age 70½. Exempt withdrawals made up to the required minimum amount from taxation. Allow savers to withdraw 15 percent, up to a maximum of $10,000, without paying a penalty as the law currently requires for withdrawals before age 59½. These withdrawals are subject to normal taxes.”

(You can read all of their economic & tax proposals at the New York Times)

I think the suspension of required minimum distributions is crucial and I’m glad the candidates both agree on that. It’ll be the biggest help to those nearing retirement because they won’t be forced to liquidate those stocks that have lost value.

As for the second piece, of the two, I prefer Obama’s proposal because it offers 15%/$10,000 (rather than $50,000) and it is subject to normal taxes as opposed to 10%. McCain’s proposal of dropping the tax rate on withdrawals to 10% is too attractive. All of my 401(k) contributions were done in the 25% tax bracket, I’d have a huge incentive to withdraw my money because I’d immediately see gains because I would only pay 10%, not 25%. (should either proposal ever become law, I wouldn’t withdraw money unless I absolutely needed it though)

Don’t get me wrong, I still think withdrawing funds from your retirement account is a huge mistake. But people will be in trouble and they will either turn towards credit cards and dangerous loans, or they will withdraw the money anyway and simply be left with less of it. It’s truly the lesser of two evils.

{ 22 comments, please add your thoughts now! }

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22 Responses to “McCain & Obama Propose IRA & 401(k) Rule Changes”

  1. Brandon says:

    You know, this is a really attractive idea. As a young person new into my 401k, with plenty of years to go until retirement, I could see immediate fruits from my gains from matching contributions and use money that is locked up to do things such as get out of debt. I know most people would be totally against this, but because of the fact that I am so young and have so little saved, I could easily replace the money over the course of my career.

    Even if I decided that was too risky/stupid/whatever, it would give me the ability to convert funds from my 401k at my current workplace into a Roth IRA so I am getting matching funds on the contribution, but placing it into a lower cost, more choice investment vehicle soon after. This would be especially attractive under the McCain proposal as I would only be paying 10%, an amount that will probably be lower than I will ever pay in taxes in my life otherwise.

  2. savvy says:

    I think this is a bad idea. It may make people feel better in the short-term but it only reinforces the bigger issue, which is that there are no repercussions for making poor financial decisions. The government will always find a way to save you from yourself.

    If people aren’t forced to pay the cost (no pun intended) of their financial mismanagement, they will simply turn around and do it again. This is easily illustrated by the large numbers of people who refi’ed their homes or took out HELOCs to ‘pay off’ their credit cards and then ran the cards back up again. Only now, instead of having some equity and credit card debt, they have no equity and the same amount of credit card debt. They are WORSE, not better, off for being allowed to do so.

  3. Lord says:

    Suspending minimum distributions isn’t necessary since the funds can remain invested. It would reduce having to come up with the funds to pay taxes on the income, but if you don’t need it in the first place, you probably already have the funds to pay that.

  4. steve says:

    This is a horrible idea for a number of reasons. We are a society overburdened by debt, and underfunded for retirement. Allowing usage of a 401k without penalty simply continues this cycle. Social Security will be bankrupt by the time people my age retire, coproate pensions are non-existent and/or bust, and I don’t even want to think of how our society will be affected should their be no personal retirement savings.

    Additionally, anyone that has core retirement money in “stocks” at age 70.5 needs a new financial advisor.

  5. Tim says:

    This is another one of those situations where the public is going to scream to the govt, “why didn’t you save us from ourselves?” = “why did you make it easy for me to deplete my retirement accounts?”

    These proposals are really non-proposals, because they don’t reflect reality. if you are 70.5 years old, you shouldn’t have stocks, so you shouldn’t be affected by this current meltdown in the first place. the fundamental premise of lifting mandatory withdrawals, is contrary to the portfolios people at 70.5 years old ought to have. chances are that someone at 70.5 is depending on withdrawals anyways, so how is suspending mandatory withdrawals doing anything? It isn’t.

    Neither proposal suggest you being able to make up for withdrawn contributions before 59.5 years. You are already allowed to withdraw contributions in Roth penalty free. You can take out 401k loan for much higher than the $10k limit obama suggests, and the 401k loan is much better than withdrawing something you can’t replenish (yes, there are negatives to 401k loan as well).

  6. Rooney says:

    Please try something for an early withdrawal of 401k…

  7. Mike says:

    No, I think that someone that is relying on the govenrment to save them from themselves is an idiot. Anyone that doesn’t understand by now, that this money will be needed to live on after retiring probably deserves to be broke.

  8. Bob says:

    I can only see taking early withdrawals from your 401k in the situation were there is an emergency in the household. But a vacation or other large purchase to satisfy ones ego will just continue the poor spending practices of Americans. I remember when I worked and saved while others spent everything they earned on good times and material things. These are many of the people complaining today and asking the government for a bailout.

  9. Timmy says:

    The fact that the government dare penalize us on money that we have earned being withdrawn is a crime. Its MY money! It came from MY WAGES! I should be able to do whatever I want whenever I want with it and not have additional taxes added to the income tax I will already pay on it.

    If you spend all your retirement money ahead of time on useless crap than you should just have to scrap your golf time and vacations when you get old. Just because you are allowed to use your money doesnt mean you have to.

    What if you want to take it and put it in an FDIC insured account or a security or fund that your employer sponsored plan doesn’t offer? What if you come across a great opportunity to buy a business or a piece of real estate?

  10. B etsy says:

    Having stocks at age 70.5 plus is not stupid, if you know what you are doing. Do you suddenly turn stupid at 70.5 and don’t know anything anymore about investing and owning securities.
    No one should tell you when to withdraw 401 or IRA money, securites, etc. It is yours, and the government is proposing to liquidate those accounts, dump your hard earned investments into a cess pool of social security, guarantee you an annual return of 3%, and you can liquidate back to the August level of the market Value?
    Wow what a deal, that way you get to pay the government top value, and taxes on a larger amount Phooey to the plan.

  11. Eleanor says:

    I hope the suspension of the mandatory withdrawal at age 70 1/2 is put forward. This would allow people who don’t need the money to let their money build up again and also would keep more money in the stock market and help it to find the bottom. Anything coming out of the market in the near future is not desirable.

  12. SJ says:

    Does anyone believe that their 401k will not be under government control in the next 10 years no matter what we do today?

  13. Biff Yuppie says:

    I am an average guy with average debt & savings.
    50k credit card debit($1,200.00 mo payments)
    20k 401k savings

    If I took most of my 401k money & paid off credit card debt & shredded the cards,I would have about $500.00 a month to save & pay off the rest of my cc-debit.

    What is wrong with that?

    • jim says:

      It’s a trade-off and one that many people are starting to consider. The only downside of 401k savings is that you’ll have to pay taxes plus a 10% penalty, which can hurt. But you are putting it towards some pretty nasty debt so it’s not like you’re taking it on a spending spree. There’s nothing wrong, except you put your retirement in jeopardy (which may be worth it if you can take a big bite out of your cc debt).

      • Biff Yuppie says:

        Retirement? An impossible dream at best so why bother. Most likely I will work to my dying day unless the Lotto fairy is good to me.

        • SJ says:

          This is true unless you have a very large income. $50k in credit card debt is something that you will spend the rest of your life under. This is a good life lesson that you should share with everyone to save them from it.

      • Biff Yuppie says:

        The point we started discussing is McCain- Obama plans regarding 401k withdrawal without penalty. I heard that 55% of 401k accounts have loans on them. If the borrower defaults on the loan, the balance will be used to pay off the loan leaving the “saver” with nothing. Liquidating assets to pay off debit only hurts lenders.

        The problem seems to be meeting rent or mortgage payments, auto – home – and insurance payments, fuel payments, grocery and other expenses without using credit.

        People (Spouses, governments, etc.) need to learn that credit is the problem, not the answer!

  14. jenni says:

    My husband lost his job about a year ago. We have an old home that needed some emergency fixing and two old cars that have broke down alot and cant afford new cars rite now. We are 10,000 dollars in credit card debt because of these emergency situations! I dont think it would be a bad thing to take $10 grand from and ira account to pay off this debt so i can still afford my house payment and put food on the table. Not all people who have credit card debt is because of foolish spending.

  15. jenni says:

    sorry for the typos-lol

  16. Coleman says:

    I think people need to be able to obtain monies they have contributed to in these hard times, even with penalties it is better then 14% credit cards will charge us. I have had the same job for 36 years and now unemployment. I need to be able to use some of that money, besides I have lost more from my 401k in the last few months then any taxes I will ever pay on the remainder

  17. Fosters says:

    I think this is a GREAT idea, becauce I have been working for 22 yr. During these years I have bought my family land to build homes. But now my job have cut back on my Hours. So I am in need for My 401K money to remain in my home. Thank please continual to give UP DATES.

  18. Fosters says:

    Hopeful this bill will past soon, most people that I work with realy need some assistance from there 401k. This money was put aside for retirement, but when you need it now, then you should be able to use it now.

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