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

Obama in ´08!Obama’s Early Withdrawal Plan

No I’m not talking about Iraq.  Obama recently made some adjustments to his potential economic plan for America.  Obama unveils new economic plan as poll lead builds.

One provision I found particularly interesting…the new plan,

“would permit families to withdraw up to 10,000 dollars from their retirement accounts penalty-free.”

Obama says “[w]e need to give people the breathing room they need to get back on their feet…”

It’s all just speculation at this point, so what do you think of this idea?  Penalty-free permission to withdraw from your retirement accounts?  This would obviously apply to every one’s 401k, 403b, and IRAs.  Do you think it’s necessary?  Would it have any effect on people’s ability to save for retirement?  Would you like that kind of flexibility?  Is there a down side?

Penalty-Free Early Retirement Withdrawal Already Exists

There are already a few exceptions that will allow you to do an early withdrawal without penalty.  In fact, we withdrew from our IRA last year when we bought our first home.

Here are a few exceptions for early withdrawal of your retirement funds:

From a Qualified Retirement Plan (401k & 403b)

  • You die
  • You’re 55 or older and you retired or left your job
  • You have medical expenses higher than 7.5% of AGI
  • You’re ordered by divorce decree

From an IRA (to name just a few)

  • You were permanently disabled
  • You bought your first home
  • You paid for college expenses
  • You were unemployed and paid for health insurance

Why is There a Penalty?

Why was the provision built into the rules to begin with?  Why is there even a penalty?  I guess you’d think that the penalty is there to discourage moving money in and out of your retirement.  The Government’s way of forcing a buy a hold strategy on your retirement savings.

So, let me know what you think.  I know I threw a lot of questions at you, but there’s a lot to say here.  Please share what you know in the comments below.

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Last Edited: July 28, 2014 @ 11:53 pm
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Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Without looking into it beyond your post (I’ll research it more later, but I’ve gotta jet in a few minutes), I’d say this could be a pretty bad idea.

    Maybe if people had an extra $10k to throw at their debt or use to pay their bills, the current economic situation would start to improve.

    But what happens when these folks want to retire? $10k isn’t a huge amount, but depending on how long they have until retirement, it could grow a great deal.

    Personally, I wouldn’t want to tap my 401k, but then again, I don’t need the money now.

  2. The penalty-free withdrawals from IRAs and 401(k)s are a bad idea. Great the 10% tax penalty will be waived, but the income (especially) from 401 (k)s will be taxable income subject to ordinary income tax rates. So a person receiving a $10,000 withdrawal (with no taxes withheld at the time of the withdrawal) in the 25% tax bracket will owe an additional $2,500 in income taxes. You’ll really feel the pain when Uncle Sam comes calling on 15 April. Plus it’s not a good idea to sacrifice the future value of your account, needed for your retirement. Asumming a 10% average investment return per year (over 10 to 20 years that’s doable despite the current volatility the markets are experiencing today) for every $1,000 dollars withdrawn your retirement account value will be reduced by ~20K ten years on and $70K 20 years on. So a $10,000 withdrawal will cost you $200000 in ten years. Bad idea. Can you say P-A-N-D-E-R!

  3. The Obama plan is like every other economic plan offered up in the waning stages of a campaign – a knee-jerk appeal for votes from people who want money (or credit) and want it now.

  4. This just encourages people to take money out of their retirement. It may truly help a few who would have taken the money anyway but for others this may be a way to fund the holidays coming up. How horrible would that be – let’s get the kids a flat screen TV with our retirement money! He’s trying to ease the pain but we need more encouragement to save not to withdraw!

  5. I can understand why a candidate would offer this type of promise. Who doesn’t like the sound of access to more money, right? Still, I think anytime you borrow from your future you’re better make sure it’s the absolute best choice.

    In somewhat related news,

    I read a quote from the G. Bush this morning, “when money flows freely between banks, it will make it easy for Americans to borrow money for cars and homes, and for small businesses to expand.” Obama needs votes, Bush doesn’t. Why is he encouraging more borrowing, when forced lending led us to this point?

  6. Yes, I like Obama early withdrawal plan. I believe it will help our economy back sooner to its healthy conditions prior to this month crash!

  7. i’m not sure if it’s good or not to be honest with you. but what i DO know is that he’s going to win ;) aww yeahhhhhh.

  8. I’m not really a big fan of this idea. While it may offer some relief to some in the short term, it most likely will have a negative effect on many people’s future.

  9. Given the current crisis, this may be a good thing for some individuals. Retirement in 30 years is always a dream to shoot for, but if medical bills or foreclosure forces you to bankruptcy, that dream fades a bit. My biggest concern is people tapping that fund to pay off a credit card, and then turning around and maxxing it right back out. Self control is still one of the American public’s biggest problems.

  10. I’m not a big fan of this idea. I think people need all the encouragement that they can get to save, and this just gives them one more way to get out of it. No penalty? I’ll just withdraw it! It may help a short term need, but long term it won’t be good.

    I wish our politicians would stop talking about how we “need to borrow” and people need loans to borrow money for a car, etc. I wish they would start stressing more of a “save up and buy it” culture.

  11. What about if my family withdraw it every year and put that money to our mortgage prinicipal. Is it a good idea? Please anybody who has the knowledge reply to me about this and will be appreciated greatly. Thanks a lot.

  12. Gerrard!~ Lim says:

    It is like Singapore. We have this thing called the Central Provident Fund. Everyone loves it. Well not everyone but almost everyone. For those who don’t they curse and swear that the government is swindling them of their hard earned money.

    Personally, and surprisingly I think it is an necessary “evil”

    It is the imperative of the government to force people to save. As it is, some of us are not that good with our money. Well make it most of us.

    There is some good to saying that.

    There is some good to forcing a penalty on people who withdraw early from this retirement fund.

    Although some breathing room is good, it would not help much. Not in this climate. Whatever it is, what can $10,000 do?

    Sure this is a breathing space, albeit a very short one.

    Might as well not withdraw early. Pucker up and get ready for the rough ride ahead.

    There would be arguments, however I philosophically say that it is better to enjoy the fruits later. Lets rough it out first.

    Breathing space? Were there “UN”breathing space when everything was going so well Pre-2007? Did anyone stop to say whoaaa and get more people to contribute to their CPF (or IRA in US context)

    Well, anything goes.

  13. John Boston says:

    I need to eat today,I think the 7500 after taxes is a great idea.Once people get back on there feet they can always contribute more to compensate for the withdrawel they took out.

  14. Anonymous Coward says:

    I think it is a terrible idea. This country is already going to suffer as the unprepared baby-boomer generation enters retirement and will soon require assistance to live.

    I have no faith in the social security system and this would only make it easier for people to make a mistake a short-change their retirement savings.

    This kind of quick fix creates an even bigger problem in the future.

    I’ve got a better idea – why don’t candidates suggest that people sell their car to get rid of their payments, drive an old junker for a year or two instead, stop eating at restaurants, stop your cable service, and with all the spare time you have now that the TV only gets 3 channels people can get a night job moving boxes for UPS or delivering pizza. That’s a quick way to raise a needed $10,000!!

  15. All of the reasons cited previously are good reasons not to take advantage of the plan. But there are people hurting out there folks. What good is $75,000 in a 401k if you lose your home or have to declare bankruptcy? The 10,000 may be the difference between making it and not making it. There will always be people who abuse the program and run up more debt, but I believe a one-time only disbursement will do more good overall than harm. I am always baffled by “the talking head” millionaires on the finance shows who are always ripping into “government” taxes and regulations, saying “it’s your money, you should be able to do want you want with it. These are the same folks ripping this idea. I guess having access to your money free from government rules is only good when it applies to millionaires. $10,000 will be a difference-maker to a lot of regular folks. IT’S THEIR MONEY!

  16. Great idea says:

    I think this is a wonderful idea, it’s our money and $10,000.00 could do alot to help people keep their homes, pay some bills, etc. I AM ALL FOR IT. Wish it would happen TODAY!!

  17. Let the people take there own money if they need it.10,000 is not much but people need it now for basic needs.The CEO TOOK OUR MONEY and we can’t!!

  18. im all for it!!!