Obama’s Economic Rescue Plan Would Allow Penalty-Free Withdrawals up to $10,000 This Year and Next From Retirement Accounts

I think this is bad idea. This isn’t to rip the Big O. I don’t like the Dems or the Repubs. I don’t think Americans save enough and they haven’t for decades. This isn’t going to help. I guess the real question is, will this be good for the economy? Maybe. If we are facing deflation (which really really bad) then yes it could be a good thing to just dump it before it becomes worthless. I predict if the government thinks we are approaching a deflationary spiral, and they can’t kick start the credit markets, they will print money and send it to us. However, if we are facing inflation (which is much more likely) it’s bad to sell now. In any case, I don’t think this is the time to sell stock. This is the time to buy. It may never get this cheap again. I don’t believe it is going to go down to 10% like the depression. I read there were many companies (on Friday) that had more cash on hand than the value of all outstanding shares.

Crazy days Jeremy. Hold on it’s going to be an exciting ride. I wish I had more money, because there is a lot of long term opportunity right now.

Wow. Great post, Jeremy. I posted on this same issue today.

Question: What Do You Think of Obama’s New Economic Plan?

I agree that it’s a point that we can discuss without getting to political. Most commentors on my site see it as a negative for the impact it will have on encouraging savings (something deferred retirement accounts have traditionally provided).

I didn’t think about the potential tax generating aspects. Definitely back door, as you mention. Great point there.

My opinion is that, overall, our govt seems to think that the solution is borrowing more money to get things going. The message is when you’re down financially, borrow from somewhere. Bush is loosening credit so that we can get car loans. Obama is reducing penalties so people can borrow from their retirements. The idea of getting money from somewhere other that actually earning it seems to run across political lines.

Didn’t borrowing too much get us into this mess to begin with. We need to stop living beyond our means.

This is fantastic! If Barack will allow me to take money out of my 401(k) to put into real investments rather than the crap the Wall Street peddles for their own gain, I actually might be able to make the decent 30%+ annual returns I can safely achieve.

First, I don’t think that stimulating the economy through more consumer spending is what we need now so I am opposed to this. Second (and I hate that I am saying this), the proper government policy to stimulate the economy at this time is to increase federal spending on infrastructure projects, e.g., alternative energy projects. If you give the money to consumers, they will spend it on random stuff and then be broke all over again.

I agree this is not a good idea. Perhaps letting people borrow money from their own retirement plan for free, but set a time frame for the loan is a better idea for people who need to do so.

This is another way to kick the can down the road so that people might feel better short term, but they will be a lot worse off later on. I doubt the majority of people who take advantage of this would pay the money back into their retirement. (People who read this blog might, but most will not.) They will likely pay off credit cards and other debt, which is good, but they will then not change their habits and eventually go back into debt with less money in their retirement accounts. This would be a very bad idea!

While I think the idea of taking retirement money out is HORRIBLE, giving people the option if they’re in dire straits isn’t. Of course, some people who shouldn’t take out their money will but for some the retirement account is a lifeline they can’t afford to not tap. Again, I’m not saying the right choice is ti withdraw but sometimes you don’t have a choice.

As for the comment about only removing the 10% penalty, I think removing all taxes would be a mistake because then I’d take out money (not being taxed at all on those dollars is enough incentive for me!). I don’t think it’s a backdoor method of taxation by design.

I don’t disagree with you, Jim, but that’s why most plans have loan and hardship provisions. So that people do have the option if their situation warrants it. The only way I would support this proposal is if some sort of penalty free withdrawal was only on plans that didn’t previously allow for loans or hardship withdrawals. I know that isn’t an attractive option logistically speaking, but it would at least make sense and protect more people from making a stupid mistake.

And while it might be a “lifeline”, people know going in that this money isn’t easily accessible, so it shouldn’t even be a consideration. But when the government steps in and changes the rules, you’re just reinforcing bad habits.

Also, I’m not saying the tax should be lifted as well. I’m just pointing out that it is a strategic political move to offer an attractive option to people, while at the same time find a nice influx of tax revenue. From a political standpoint, it’s brilliant, but in terms of actually helping people, it’s really not a viable solution.

I think it’s silly how both candidates have dueling tax cuts. You know the bailout, the deficits, and the wars aren’t going to pay for themselves. The money is going to be collected as taxes eventually.

Worse, we only have vague bromides about the actual plans… the devil is in the details.

Back in the present, most economists agree that more flexibility is better. I can make rational choices about what to do. I can keep the money there for tax free return. Or I could take it out if I see a rental property that now has cash on cash returns better than t-bills. Or I might do some arbitrage and fund a Roth or HSA account.

In general, I agree that it would be a bad idea for most people, under normal circumstances, to do this. But it needs to be taken in perspective. 1) It is only 15% and $10k max. That’s not much in the scheme of things. 2) maybe it’s better than losing your house.

Anon, you bring up a good point, and I think this illustrates the disconnect that occurs between people like us (who are actually interested in finance and read finance websites) and main street (I hate that phrase lately) America.

Clearly, as you mentioned, freedom and flexibility is great. And for people who are knowledgeable enough to realize they could capitalize on using a withdrawal like this to make money elsewhere, let alone even know what a t-bill, roth, arbitrage, or HSA account is, we can see the many benefits of this. Unfortunately, most people who are in a situation where they are entertaining the idea of withdrawing money from their sole retirement account isn’t in a position to understand the many ways they could use it to their advantage, and instead use it as a quick band-aid to prolong an even more serious problem.

There’s no denying the fact that withdrawing some money to prevent the loss of your house would be the better course of action, but without any sort of requirements as to whether or not you qualify for this type of withdrawal, it’s going to lead to a lot of people who aren’t in dire straights to simply take the money because they can. I mean, why worry about creating a budget, curtail your spending, or take other sound financial measures when the government is giving you free access to your money?

Just like in the plan I service, we have it set up so if you are facing a financial hardship, all you have to do is provide proof (i.e. foreclosure notice, unpaid medical bill, death certificate, etc.) and you’ll get access to your retirement account. This ensures that the people who really need it can get it, and people who are just looking for some quick money have to stick to their plan so they don’t jeopardize their future.

Flexibility is great for people who know how to take advantage of it, but there are a lot of people who will take advantage of the opportunity when it isn’t necessary, only to make matters worse for themselves in the future.

I agree with many of your points and other good points have been made in the comments, too.

I don’t agree that everyone will “take advantage” of this. One of the benefits of tax deferred retirement savings is that you don’t pay taxes on your higher working marginal income tax rate and will instead pay on the lower marginal retirement income rate. Also, most knowledgeable 401(k) participants know that this is not a good time to sell so they would not be eager to liquidate.

In reality, and as I am sure you are well aware, many participants with very low balances look for every opportunity to take money out of their DC plan by whatever means they can find. These are the people who would likely constitute a large percentage of the people “taking advantage” of this policy. Frankly, these people (even in aggregate) are not likely to impact the market much nor would a modest distribution have much impact on their long term financial well being.

That said, I would be in favor of limiting this policy along the same lines as hardship withdrawals. Perhaps a more sensible policy would be to simply eliminate the penalty on hardship withdrawals. I am sure DC recordkeepers would support that idea since administratively it would be much less burdensome.

I’m a non-voting Obama fan, and I think this is a rubbish idea. Perhaps changing the rules so that 401(k) loans don’t have to be paid back as soon as you change jobs would be better.

This is a great post. You make very compelling points and just to add another, we have to think not only are we selling for a loss we are also compounding the problem because we are pulling money out of the markets. Because there is a cap on how much you can take you will still be invested in a company that you and many other people are pulling out of which is increasing your losses and dwindling down your account even further.

I am very much pro-Obama, but when I read this I really had to scratch my head and go “huh?” The last thing we should be doing right now is making it easier for people to justify sacrificing their futures as a quick-fix solution for today’s problems - that’s part of how we got into the mess we’re in! I think if we go ahead with this plan, anyone who wants to withdraw money from a retirement account should be required to go through some financial literacy education so they understand exactly why this is a bad idea and can really make an informed decision about whether to go through with it or not.

A better idea would be to allow investors to self direct their investments in their retirement accounts (particularly the 401(k). Right now we usually are forced to invest in the Wall Street investments. This only serves to line the pockets of brokers. The investments pay poorly (less than 20 percent–usually much less), principle cannot be protected or insured, are overly complicated, subject to corruption and force you to work with people you don’t necessarily trust. If I could self direct my 401(k) contributions like I can with a Self Directed IRA, I could easily realize 30 to 100% returns by investing in real estate. You are legally allowed to do this, but retirement account administrators don’t want to lose out on the commissions.

The restrictions are put in place by people who are more interested in making money for themselves than the investor.

I do not claim to be a financial wizard or an economic expert; I work in the accounting field. Though we have not lost our home, our family has been directly affected by this economy with lay-offs, pay cuts, and heavy 401k losses. I believe we would greatly benefit from using a portion of our 401k savings by putting the money into our house. Our paint is peeling, our roof is leaking, and our list of various minor repairs keeps growing. This money would help to repair our only other investment, which just might be our main source of retirement in 15-20 years. I for one hope this passes. We need change, and fast.

I think this is a good idea. When people lost their
jobs and the economy is this bad , what else can we do. He said this would be for the next two years and not long term. With the ecomomy this bad, I lost half of my 401k, the other day when the market went into a dive. That’s $11,000 , I
could use to pay my morgage for almost 6 months and have my house which is my only investment. What will happen after I save all my 401k and at 70 I lost my house, where will I live?
Saving is good , I am all for saving my 401k, but
can you imagine when you are stuck with bills upon bills, who do we turn to? I cannot wait for
changes we need it , the middle class are suffering and most of us close our eyes to all this
If people are responsible to take out a 401k for their future which is not an obligation, it is a choice, I think most people will know when to go into their money . Things happen to different
people , They lost their jobs , they fall back into paying their morgage. Things happen, Its good to have some where to go when there are no way out. I understand your concern , but to my understanding it is up to $10,000 for the next 2 years.

I’m not too sure how I feel about this. On one hand, the likely people who would be taking advantage of this, would be people who desperately need the cash to pay off debt or to make their mortgage payments. Their funds are likely rapidly declining in this current market anyways, so they are probably thinking it’s better to use it than to lose it. On the other hand, the people who are in this kind of trouble probably aren’t the people with robust funds in the first place, and the withdrawals are really going to bite them in the long run.

Many of you who are against this are simply not thinking clearly. I have a friend who has been out of work for over a year, he get’s some part time work but nowhere near enough is generated to pay for all of his monthly expenses. He used up all of his unemployment and his savings are what he has in his 401k. Luckily he is not married but let’s look at the alternatives. He can either rack up huge credit card debt or he can take money from his 401k to get through this emergency. He’s gonna have to pay the taxes eventually and since he won’t be making much money at all this year there is a good chance he will be able to recoup a lot of that money come tax season.

This is not a great idea for a person who is not in dire need but that is not the point. Whith the massive number of people who have lost their jobs and have used up their unemployment their is only one source of income left. Many of these people will be forced to access their 401k accounts regardless of the penalty. I would much rather not pay the 10% penalty than pay it. A person who is not in a desparate situation is unlikely to take the money out because of the tax implication.

Dave, your story doesn’t make any sense. If your friend is out of work, his 401k is already open and ready to be withdrawn. Once you leave your employer, your 401k/403b/457 or whatever account you have becomes available to you to do as you please if you pay the taxes and penalty.

This proposed rescue plan has little to do with people who have already lost their jobs, because these people could have already withdrawn their funds (all of them, not just a 15% limit) or they could have rolled them into an IRA for easier withdrawals, etc.

If this plan was to help people who have lost their jobs, then it would simply eliminate the 10% penalty for those who are no longer active participants who wish to withdraw money. But as it stands, this would also allow people who are active participants that normally wouldn’t have access to the funds to suddenly gain access to them.

I’m with you, if someone has lost their job thanks to the economy, sure, let’s get rid of the 10% penalty for a few years. Again, this is helping those who are really in need. But as it stands, the plan would allow people who aren’t in such a situation to recklessly withdraw their funds, and pay unnecessary taxes when they aren’t in such dire situations.

Jeremy, this has everything to do with people in desparate situations. Your 401k is always open regardless of whether you are employed, either way you have to pay the 10% penalty in most instances. Maybe you didn’t understand, I didn’t say my friend was retired, he is 36 and therefore does not qualify to take out money without penalty. Even if he rolls it over into an IRA he does not qualify to take his money without penalty. Just to be clear the only way he could do this are in the following instances.

1. Permanent disability of IRA owner
2. Death of IRA owner
3. Withdrawals are used to pay non-reimbursed medical expenses
4. Withdrawals used to help pay for first-time home purchase
5. Higher education costs
6. Money is used to pay back taxes to the IRS after a levy has been placed against the IRA
7. Withdrawals used to pay medical insurance premiums
8. Made on or after the day the IRA owner turns 59 1/2

As far as I know these are the only ways you can withdraw from an IRA early without penalty. The whole point of Obama’s plan is so that people in financial difficulty can use their own money without penalty.

The way you seem to be thinking about it is that normal employed people are just going to take out their 401k money to buy a washing machine or something, anyone who does this is just plain stupid and I really doubt this is why Obama is proposing this measure. If you look at Jenny’s response for example, this is exactly what this proposal should not be used for, your retirement money is for your retirement but in the case of extreme financial difficulty I do not want to have to pay the government a 10% penalty and neither should anyone else.

Dave, I understand what you’re saying. But in almost every situation, 401k assets are NOT available while you’re an active participant. Unless your plan provides loans or hardship withdrawals, you can’t be employed with the company that provides the 401k and just tap into it whenever you want prior to age 59.5. For most people, they have to wait until they terminate employment before getting access to these funds.

That’s why I said in a situation like your friend or anyone else who lost their job, there is nothing holding them back from taking their money right now. And that’s why I also agree that if you’ve reached the point where you don’t have a job, suspending the 10% penalty is fine for that.

And the IRA doesn’t provide any loopholes to get the money out without penalty, but it provides much more flexibility. When you leave a job and opt to cash out your 401k, in almost all cases, it’s a lump sum deal. Whether you needed all the money or not, you typically have to take it all (of course you have 60 days to roll it into something else, yada yada) but most people who feel they need the money won’t do that.

But if you rolled the money into an IRA, you can limit your tax and penalty burden by taking only what you need. If you have a $20,000 account but only need $1,500 to cover a medical bill or something, you don’t have to liquidate everything and pay taxes on it all just to get you over that hump. You can take just what you need so that you aren’t hurting yourself too bad and letting the rest of your money grow.

I think people give the average person a little too much credit in thinking that people won’t take out money if the option is given, or won’t spend it on something stupid. I could start a whole new blog that just shares the stories I hear about what people want to tap into their retirement account for. Remember, people who are online reading about finance issues are obviously not going to do this, and we can clearly see why it wouldn’t make sense. But that is a small minority of people out there.

So basically you disagfree with Obama’s plan not because his idea is stupid but in fact stupid people are going to make stupid decisions with their money.

I though even if you were still employed you could take a loan against your 401k…..is this not the case?

I agree with you that there are people who will take out the money to buy a 52 inch plasma but aren’t people who are this stupid going to make this irrational decisions anyway? Why compound their bad decisions by adding a 10% penalty?

Don’t get me wrong, the 10% penalty in normal times is a good thing but I just think that with unemployment surely going to hit 8% in the near future we should prepare people for the reality that they could be spending many months without a job and they will need to access their retirment funds whether it is in a 401k, IRA or under their mattress, a penalty during these difficult times seems to me to be overkill.

Dave, that was exactly my point. Most plans allow loans, which by default, let you borrow up to 50% of what you’ve contributed. Taking a loan incurs no taxes, and no penalty. So if people are really hard up for money, this should be their first plan of attack. On top of that, most plans offer hardship provisions, that let you take out money above and beyond a loan, although there would be the taxes and the penalty. And if you’re no longer employed with that company, your entire balance is available to you.

So what I’m saying, is not that Obama’s plan in stupid, but it just shouldn’t blanket everyone. The penalty should be waived for those who are out of work, and those who do have a hardship.

But if you give people the opportunity to take their money, without needing to take a loan, and without the penalty, you’re going to be left with a lot of people who otherwise wouldn’t have even thought about tapping into their account taking money out when they don’t really need to.

That’s all I’m saying. I do think a break should be given to those in need during times like these, but if you just grant everyone a free withdrawal no questions asked, a lot of people will just take it when they really didn’t need to. So if there were some limitations as to who could get this access, it would help prevent people from making poor decisions.

Jeremy in certain situations you can take money from an IRA with out paying an early withdrawal penalty similar to the hardship provisions attached to the 401(k). I just wanted to correct you.

Bad idea all around. I’m not sure whether there would end up being a tax on gains (presumably the stock is worth around what you bought it for or less these days); however, people would be taking out depressed savings and losing the opportunity of time to compound future growth. I agree with other commentors, it sends the wrong message. When you are in financial difficulty the answer is not to borrow more. I wish our elected (and soon to be elected) officials would learn that.

I think this is a good plan. My husband and I are just keeping our heads above water. Times are only going to get worse. We have lost $23,000 in our 401k so far this year. My husband has stopped contributing, because we need the money. I understand a hardship loan, but why should I wait until things get that bad, and I am in forclosure. I am trying to get ourselves caught up, and have been seriously debating taking money out, even with the penalty. This year had been chaos. I lost my job this summer. I have vested money in my PARA account, but cannot access it. My husbands company is slowly laying off local workers. There has been 3 sets of layoffs in 4 months. We are thinking it will be before Christmas that he gets the axe. And I found out I am pregnant. So, loan would not work, get socked anyway, when husband gets layed off (ineveitable sp?) Why not try to catch up now while we can, and our credit is not ruined and I am not in forclosure?? It is a limited amount. Why cant I spend the $10,000 to keep afloat instead of it washing away in our 401k?

Your “BACKDOOR” section is not corect. The proposal temporarily eliminates the 10% early withdrawal penalty and the income tax liability. The money that is withdrawn would be funneled back into our economy - a good thing.
The proposal also limits withdrawals to 15% of your savings, with a maximum of $10,000 (which is not very much…this is a last resort for people who NEED their savings).

This is a very good idea. It is easy for everyone to sit back an say tapping into your retirement is a bad idea, until they actually need the money. I have a large retirement saving for a 24 year old and I also have a large amount of credit card debt. I got into credit card debt trying to maxout my 401k to take advantage of my companies very generous match. Now if I could cashout 10,000 pay off my credit cards and still have 60,000 in retirement saving at the age of 24. Money I am saving on credit card interest would be close 20%. I think 20% is greater than what the market will do over the next 5 years so it is a win win.

The plain and simple answer is: ‘it is good’ if your in need of it you can access it without worry. Most won’t touch it but the ones that need it and saved it are entitled to it !

Funds termed long term savings are not if you tap them before long term is here. Spending the money is a bad idea, but is a good way for the government to generate tax revenue. I may use the opportunity to transfer in kind to my ROTH (No losses). I will pay my taxes now. I will be making a big return on my money if the new adninistration enacts only part of what it would like to do. I hear changes are good, but they cost money and the only the government can get money is to print it (inflation) or transfer from those who have it (taxes). I am willing to that the tax rate today will be lower than the future, say 15 years.

Ok so what if someone has already taken out a loan on their retirement and takes the money out to pay off the loan. The money goes right back into the retirement account The person saves all of the interest on the loan but pays the taxes. So if the taxes are less than the interest over the course of the loan its a win win situation right? No money is lost in the account and the person pays the interest up front in the form of taxes, and loses the monthly payment on the loan.

I think it is a good idea. Remember it is optional as is the IRA or 401K contributions. Let the individual make the decision based on their own situation. Some folks will take it even with the penalty. Keeping it in retirement is a good idea if you are not sinking now. I think it should be 50% penalty free. It is your money and by investing it you helped the economy. Now you really need it and you get penalized? Paying the taxes is penalty enough.

There is a danger in every generalization irrespective which way it leans because it will hurt someone.

I am a long term saver at 56 years old. Took early reitirement planning on doing 72T distributions. The Federal Mid Term Rate dropped like a rock and rules changes now force you into using it. Not having enough cash flow, I went back to work.

I could use the the extra $20k distributions now. I have to pay the tax sooner or later so I am indifferent to when it gets paid, but I really don’t want to pay the 10% penalty. Getting money out when you need it is not trivial and has hamstrung our plans.

I offer the suggestion that you be sure you understand that IRA withdrawals are taxed at ordinary income rates vs the option of investing in a taxable account over time an paying taxes at long term cap gain rates….without any limitations as to when and under what circumstances you can use YOUR money.

:^)

Best regards,

Bruce

Scam or not, giving people access to their own money is a good thing. Let the people choose. If the market turns around, obviously they’ll loose more in the end. But with the threat of hyperinflation around the corner, at least I can get 10,000.00 of it out of the dollar.

I am sorry, but I got hit with 34% loss YTD… When will I be able to recover from that? and if I can tap into my 401K to reduce mortgage debt or student loans in order to adjust my savings/spending ratio, looking at cold numbers it just makes sense.

My wife and I make a good living. Together we earn in excess of 100,000. Plus we both have taken on a part-time job. We have 4 children that we chose to send to a parochial school. Three of those children are now in college and we have amassed about 80,000 in college loans related to “Expected Family Contributions”. We have not been extravagant with our spending over the years but my wife did not always work outside of the home (when the children were younger). Because of this, we also have about 42,000 in credit card debt. We also owe more on our house than it is worth. We bought it 25 years ago for 56,000. We make enough money that we are able to make our monthly payments but are scraping by each month. We are trying to pay out debts off but it is very difficult. Each year more money accumulates for college debts. And credit card debts although we are trying not to use our credit cards. We have thought about foreclosure or bankruptcy but don’t want to do that if we don’t have to. Obama’s plan to allow people to take 10,000 out of my retirement plan this year and 10,000 out next year really feels like something that can help our family now when we need it. any comments or feedback welcome.

Politics aside this plan would greatly help people like myself who have just started investing in their 401k and could use the penalty-free withdrawals to help as “insurance” on mortgage payments and help avoid a foreclosure. Look at it from my standpoint. I just purchased a home in April when I thought it was a good time because I locked in at a great 30yr fixed rate…and it was. Most people save up money so they can buy a house, not so they can live with a cushion after the fact. Working for a financial firm, job security is gone and employment literally is day to day. I would feel a lot better about things knowing I could pull out 15% of my 401k to help me survive a few monthly mortgage payments if I happened to lose my job. The last thing this country needs is more foreclosures, and I don’t want to become a statistic!

I think I should be able to access the money I put away. I am one of those that are distressed not due to being upside down in my house but due to a serious pay cut I had to take. I am also a college student and to have to pay $600+ for books, fees, and tuition is killing me. I need my money and shouldn’t have to be penalized.

I think the plan is a good idea. People go on and on about how it’s bad because it takes away from peoples retirement, well for me retirement is in 30 years! I would rather take a little out now and pay off some debt and then up my % rate then have to struggle day to day just to be able to get more 30 years from now. My main concern is now, I know that I put enough in to still have plenty in my retirement account 30 years from now if I just take out $10k now. Plus I have a pension as well. It’s my money I shouldn’t be told I can’t spend it. That’s just me though.

When will we find out if we can do this. I like the idea.

answer

this is great for people like myself that need money to get out of debt and move forward. Just pray that this happens soon.

My money, my choice. I worked for my 401k not you. Who are you to tell me to save more. The 10% tax only benefits the IRS. Whether the law changes or not people are being forced to turn to their 401ks for help.

Lets not forget who has 401ks, these are not vagrants or wellfare junkys looking to score. These are hard working Americans who have stock piled money away for their future. A future that is now in jeopardy. A small percentage (no one is talking about withdrawing the whole thing) to pay off high interest debt is a smart move. Why pay your credit card holders high interest when you can withdraw from your 401k and reinvest the new cash flow.

The 10% tax isn’t a deterrent, it is a way for the IRS to penalize already suffering individuals. These people know the long term affects of withdrawing. Stop treating them like ignorant cattle.

I know in the long run it’s an awful idea to take money out of your 401k but at this point it’s either sink or swim and I can hardly keep my head above water. I’m 40 years old and I’m one of those people that has never once paid anything late. I survived cancer in 2005 and my husband lost his job in September, 2008. He’s working again but for much less and the bills just keep coming. It’s January, 2009 and we still have paid everything on time but it has come with a price. We have not eat a meal out in months. We watch tv for entertainment. We cannot even afford to buy healthy food at the store. I think everyone has to make their own choice as to whether or not this is a good idea. The money in my 401k is not going to do me any good when I’m gone so I’m all for taking some out now to survive.