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

Posted By Jim On 10/16/2008 @ 12:00 pm In Government | 22 Comments

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 [3] 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 [4])

I think the suspension of required minimum distributions [5] 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 [6], 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.


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/mccain-obama-propose-ira-401k-rule-changes.html

[3] Jeremy at GenXFinance hated the idea: http://genxfinance.com/2008/10/14/obamas-economic-rescue-plan-would-allow-penalty-free-withdrawals-up-to-10000-this-year-and-next-from-retirement-accounts/

[4] economic & tax proposals at the New York Times: http://elections.nytimes.com/2008/president/issues/economy.html

[5] required minimum distributions: http://www.myretirementblog.com/ira-required-minimum-withdrawals.html

[6] 25% tax bracket: http://www.bargaineering.com/articles/2008-federal-income-tax-brackets-official-irs-figures.html

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