Is Obama’s Plan to Let People Tap Into Their Retirement Plan a Good Idea?
I don’t discuss politics on this site, and for good reason. It always seems to bring out the ugly side of people when a heated debate starts. I would rather talk about things from a pure financial standpoint and keep politics out of it, but something came across my news feed this morning that really caught my eye. When reading a headline about Obama’s economic rescue plan, I saw that one of the components of the plan would be to allow people to withdraw 15%, up to $10,000 from their retirement plans, this year and next, without penalty. I don’t care what political party proposed this idea, but this is a shortsighted band-aid of a solution that won’t address long-term financial troubles.
UPDATE 02/2009: As of now, the stimulus packages that have gone through and become law do not provide the penalty-free withdrawals that were initially discussed.
Sending the Wrong Message
Suddenly allowing people access to some of their retirement funds without risk of an additional 10% penalty is sending the wrong message to savers. Many people that this economic plan is targeting are those who need retirement savings the most–the working class who are struggling to get by, yet know the importance of saving for retirement. These individuals aren’t typically going to be the ones to amass a few million to fund their retirement, and instead are going to rely on what they have saved to provide just some sort of supplement to Social Security and possibly a small pension. If you give someone an opportunity to wipe out 30% of their retirement account over the next 15 months, you’re just setting them up for having even less in retirement, whether that’s just a few years away or a few decades.
A Backdoor for Generating Tax Revenue
If you notice, this plan only calls for eliminating the 10% early-withdrawal penalty, but guess what. You will still have 20% withheld from your distribution for federal taxes. That’s right, the government would be nice and let you keep that extra 10% you’d otherwise have to pay, but they will gladly collect their tax on the distribution. If you do the math and look at the hundreds of millions that people would begin withdrawing, the government stands to rake in a good chunk of change.
Now, I’m not against the government getting their money. After all, these were tax-deductible contributions that have grown tax-deferred, so they aren’t doing anything wrong. But what I do have an issue with is that this comes across as a wolf in sheep’s clothing. You’re making it very attractive for regular people to suddenly get access to a few thousand dollars of their savings while you quietly rake in taxes that would otherwise be tied up for decades. Factor in the loss of the power of compounding by taking the withdrawal with the taxes they will be paying, and you’re making it a raw deal for the individual.
It Looks Good On Paper
It looks good for voters, but that’s about it. Obviously, everyone is saying whatever they can to try and elicit votes, and at first glance, it’s easy to see why this idea would make sense. In theory, this really would provide some cushion for those who are in a tight spot. The other part of the theory is that only people who are left with no other option would withdraw money from their account. The reality is that if you allow this, even people who aren’t on the brink of foreclosure or in dire straits will tap into their account to take advantage of this “free” money. It would be seen as another stimulus check. So, while some people really could be helped out of a financial bind, there are just as many people who will see this as an opportunity to take the money out when they otherwise wouldn’t have considered it or even had the option to. This will just be a short-term shot in the arm that will put them at a greater disadvantage in the decades ahead when they need to rely on their savings for retirement income.
In addition, most plans also already allow loans and/or hardship withdrawals. Those provisions were put in place for exactly these types of situations, where someone might need real financial help. Not only that, but since over 80% of retirement plans allow loans, people should be seeking a loan first since there is already no penalty or taxes owed as long as you make payments on the loan. In addition, loans typically allow you to borrow up to 50% of your contributions, which may be far more than the proposed 15% or $10,000 suggestion. Even with these provisions in place, I still see people who use them to treat their retirement account like a bank account. So if you offer a period of time where they can take the money without penalty, they surely will.
You Couldn’t Pick a Worse Time
Most people’s accounts are down anywhere from 20-50% over the past year, so selling now to take advantage of this withdrawal would make matters worse. Not only would you be selling at a loss, but you’re going to lose another 20% to taxes. If that’s not a raw deal, I don’t know what is. Some people stand to take a 70% or greater loss on the money they would take out.
Not only that, but this creates more selling in the market. If we started to see a steady flow of people liquidating what part of their retirement plans they can, you’re putting even more pressure on the already battered stock market. They keep telling people not to worry, stay the course, and keep investing, but this plan basically encourages people to take their money out.
What Do You Think?
As I mentioned from the beginning, this doesn’t have anything to do with one political philosophy over another since I’d be equally dissatisfied with this idea if it was presented by another candidate, or a non-partisan academic. I might be a little biased since my line of work has me dealing with retirement plans and their participants, but with the stuff I see every day and the decisions people make within their plan, I know this would be a very bad idea that’s trying to fix a much larger problem. What do you think?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Obama as president in four years of tenure has made several good and bad decisions. One of the bad decision he made was the life insurance project where lot of americans complained. But Obama also inherited several mistakes from previous administration and the big problem he inherited was the economic crisis. He design strategy to combat this economy crisis and it is really clear to us that four years is not really enough. So this would be one factor that obama should be reelected again in my opinion.
I have lost 75,000.00 in the last two weeks and it keeps going down , soon the penalty I would of had to pay would have been lost anyway WTF!!! They just keep smiling and raking in there 6 figures
Look Im just a kid, twenty years old and newly married. I work at a fastfood resaraunt for 7.25 hr they only let us have 30 hours a week. now im very thankful for my job, because the unemployment is rediculous. my husband and i rake in $900 after being robbed by probation. we manage an apartment, groceries, bills, and all that good stuff. I walk to work, I walk to college and everywhere else. now how many people do you know that can manage money like that, and still be comfortable? not very many because americans have become careless spenders. but if i can do it anyone can. but really..let them withdrawl their money. its all about personal choices. obama is giving us a choice. i like the freedom of choice dont you?
This Obama deal may sound better once the 40lk gets nationaized and your 401k account will be rduced to an IOU like social security. Neither source of retirement money will be solvent and your assumed retirement income will have served Obama's higher prupose of "spreading the wealth" The only way to escape this is to get your money out now and pay the stinkin' taxes, while it is still worth something close to what you saved. You will owe the taxes anyway at retirement, and the rate will be astronomical, since you will be the envied class who bothered to save and thus punished. The only ones who will make out are those on perpetual welfare and underachievers.
I don't know about all these politicians. They have jobs. I am unemployed. When this unemployment runs out I don't know what I will do. They say it's getting better but I don't see it. In my state the cuts are going crazy. If I have to wait, I will be out on the street. We have 3,000 carpenters on the bench (out of work), That's out of just over 5,000 carpenters. I don't see any sign of an improvment at all. Where do they come off telling us about surviving when they have jobs, and BENEFITS. They don't have a clue what is going on for regular people like us. At least give us a way to get through these hard times. These politicians have jobs, they have benefits, they can support their families, and they don't even know how much a loaf of bread or a gallon of milk is!! This is the first time I have not had even a chance of getting a job!! Getting to take out $10,000 out of my 401k without any penalty would really help me to get through what you call tough times that I call impossible times. FAMILY FIRST!! Aloha Joseph
i think it's a great idea, my husband & I work, we have 5 kids altogether, we have a mortgage, child support for 2 kids, etc. struggling to pay a little more than the balance due on our mortgage & credit card each month, will make the call tomorrow and get started.
Why not let me take $10,000.00 out of my retirement.My money has been invested and lost by people who only have their best interests at heart.Let me take some money out and buy some real estate or invest it myself.Real estate is a much safer and lucrative investment than letting the "professionals" have it.They have shown me what they can do.It's my turn.
obama should get legislation passed to allow people with 401k or irs who have lost their ass to be allowed to withdraw any or the full amount of what is left in their account to pay off some or all of their debt as times are tough for all us joe six packs and this would be a solution to get our financial things in order, if he can bail out wall street and the financial markets he can surely do the same for the people who elected him.also pelosi and reed have got to go,oh pay no taxes on withdrawels of any amount
My husband got hurt on the job a year ago very badly. He is still undergoing treatment, has possible future surgeries and his knee, hip and back will never be the same!! His company has just terminated him using a loop hole to union contract; union is trying to fight it. In the meantime, my family will now incur COBRA, worker's comp. may end soon, which is 40% less of his former salary...future is very bleak! Our daughter is a sophomore in high school and with impending expenses and college just around the corner, we are really starting to get worried. I am working and we are just a normal family with no frills and we could sure use the money to pay impending insurance payments, mortgage payments, etc. My prayer is that a solution is found for all the unemployed families that are hurting!! Quick question: why did we let someone make rules for: when we could have OUR money, at what age, how much and if we wanted it earlier, we would get penalized to get OUR OWN MONEY? Plus, now, our 401(k) and IRA's have lost money and we are at a key time when we cannot make it back.... Thanks for listening!!
I wanted the opportunity to get the money because it would help my family get in a much better financial situation. The money I have in this account has lost tremendously and I could put it to better use. I have another retirement account due to career change and I would not be hurting my retirement plans.
I just lost my job due to cut-backs, so lifting the penalty on using money from my IRA may just keep me from losing my house & car. Put yourself in the shoes of us that have lost jobs and trust me, it could really help out.
I work as a union electrician, however since my local is in the most racist city in america, black men are always the first to be laided off. If you are a white man and work 45 yrs you will retire with about 38 credits thats equats to a retirement of about 2300 per month. If you are a black man and do 45 yrs you will be lucky to get 18 credits or 1080 per month. I have watched my friends loose their homes and cars, while they have over $100,000 in their annuities. Why should anyone have to beg the government or the Union for their own money. The whole wall street system is a racket, i pray for jail time for these white collar criminals. If you stole 1 dime for any reason the police state would be all over you. We have witnessed the biggest theft in the history of the world and knowone is going to jail, but i seen a black guy get 25 yrs in prison for stealing 1 can of spam. Is that twisted or what which theft was more egregious?
While everyone talks about the taxes on the 401k withdrawal, how is it possible to tax, tax deferred income when that income has taken losses in excess of 50%. Why then can I not claim my losses in my 401K, if it is so damned wonderful, when now it is bleeding like a sieve. I don't see the government stepping in and propping up my hard earned dollars to at least keep me at a level where I can at least have what I actually put into the plan. and simply have a 0% gain. All you friggin wizards of financial smarts have no idea how to save our retirement plans, and you certainly have no idea how to rescue our economy. We are giving hundreds of billions of dollars to the same financial jerks that screwed us in the first place and then most of you have the nerve to tell us that we don't know what we are doing? The whole financial community should be tried for treason, starting with out government.
Thank you for your insight, it is a wolf in sheep's clothing. As usual President Obama
just forgot to mention the 20% tax. It sounded like free money and I was ready to go buy a dump truck and get ready for the rest of his stimulus package, shame on me.
Ready, fire, aim!
It seems to me that too many people are quick to criticize anything not benefiting them directly. I'd like to buy a house. If I could withdraw 10% from my IRAto add to my deposit for the home purchase, it would be great. Obama's plan offers a tax credit to offset any federal taxes on the withdrawal.
What's not to like about that? This would help put people like me in those unsold homes.
that sucks...I'll take the penalty then...probably all I'm ever going to see of my retirement money anyway....its dwindling away as we speak.....figures the one idea that would help me in his proposal gets the axe...I hope he legitimizes internet poker...that would be smart too so don't count on it...Thanks for responding!
It did not get included in the stimulus. I did a little research myself. U don't remember what site I read it on but I am certain it is not included.
Did this idea get included in the stimulus? I have tried to find it but can't.....I need to know as I am seriously considering this option and would like to save the 10%. I know its bad long term but the short term is worse. I need to do it soon so if a 10% saving is not on the way then I will act now....I appreciate any help I can get on this matter....thanks!
If the federal government can dole out tens of billions of taxpayer dollars to Wall Street types that, in turn, use the money to pay out executive bonuses, redecorate their offices, and buy corporate jets, then letting people use a little of their 401K money in the midst of a crippling recession doesn't seem like such a big deal, now does it?
Make it happen, Mr. Obama.
It's a bad idea, but some of us may have no choice. I've had to do it before out of desperation and may have to again now that I've been laid off.
I didn't know this was part of the plan and blogged on it the other day: http://tabulacrypticum.wordpress.com/2009/01/27/a-plea-to-our-president-unlock-the-401k/
For some, tapping into retirement funds may be the only other option other than bankruptcy or foreclosure. For those with such urgent fiscal needs I think it would be very helpful to not have to pay the 10% penalty. Of course they would have pay their ordinary taxes. The idea that the government is looking for a backdoor to drive tax revenue is over the top cynicism.
I don't think this is all bad. If you have money set aside and are in the dreaded "rich" tax bracket that Obama has indentified, access to this capitol will allow for investment in other sectors. For example, its a great time for people with enought income to buy a second home and access to this money may help with a downpayment. If you have already put away six figures into an IRA, a 10K withdrawl will hardly kill you for retirement and fress up a little extra cash to reinvest. I know you have to pay the 20% but since Obama and the Dems may do away with 401K's completely, its time for people to think about other ways to fund their retirement, like real estate which we all know will recover over the long haul.
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.
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.
this is great for people like myself that need money to get out of debt and move forward. Just pray that this happens soon.
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. :)
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.
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!
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.
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.
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.
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.
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.
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.
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.
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 !
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.
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).
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?
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.
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.
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.
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, 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.
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, 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.