Obama Versus McCain And Your Retirement Savings

In face of the current economic crisis, both Obama and McCain are proposing changes to the IRA and 401k rules hoping that it will help restore economic stability.  Although we usually take these retirement plans as certain, we are reminded that rules governing IRA and 401k are malleable and not set in stone.

Obama’s Proposal Versus McCain’s

First, let’s take a look at their proposal regarding Individual Retirement Accounts (IRA) and 401k (from The New York Times).

Obama proposes:

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.

And McCain proposes

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.

Mandatory Annual Withdrawals

You’ll note that both agree on temporarily suspending mandatory annual withdrawals, which is currently required for anyone that reaches the age of 70½.  I think this is a good idea because it does two things:

1. Retirees who can afford not to take money from their 401k accounts have the flexibility not to sell their investments at lower prices.
2. More money staying in 401k means more money staying in the stock market.  This hopefully restores market stability and reduces the volatility we have been seeing lately.

However, there are two things that we should also consider:

1. A prudent retirement investment plan would dictate that not too many of 70+ years old are holding a significant portion of their retirement savings in equities.
2. What happens if these retirees die before using up their 401k?  The surviving spouse could roll it over into an IRA to avoid tax penalties, however, other beneficiaries may be stuck paying the more expensive estate tax.

Early Withdrawals

Normally, there’s a 10% penalty if you withdraw money from your 401k before you reach 59½.  However, both Obama and McCain wants to allow savers younger than 59½ to withdraw up to $10,000 at normal tax rate for Obama and $50,000 at 10% tax rate for McCain without the early withdrawal penalty.

In general, I don’t like this idea at all because this change would make it easier for Americans to borrow their future to make life a bit easier today.  McCain’s plan is the worse of the two since he’s actually motivates savers to withdraw money from their retirement savings to take advantage of the 10% tax rate.

If the goal is to help troubled homeowners, then this proposal is the worst solution ever. If the homeowners can’t afford the monthly payment now, cannibalizing their retirement savings will only delay the inevitable — foreclosure.  With the many bad mortgages floating around, how many more months could $10,000 or even $50,000 last before these homeowners are back in the same dilemma again?

Here what other bloggers are saying about this issue

• McCain & Obama Propose IRA & 401(k) Rule Changes at Blueprint for Financial Prosperity
• Obama’s Economic Rescue Plan Would Allow Penalty-Free Withdrawals up to $10,000 This Year and Next From Retirement Accounts at Generation X Finance
• Wanna See the Market REALLY Tank? at Real World Finances
• The Candidates’ Economic Proposals: IRA & 401k Withdrawals at My Open Wallet

Lastly

For once, I wish these politicians could come up with something more than a short-term band-aid solution, or a sleight of hand.  Things are already bad as is, don’t make it easier for Americans to throw good money after bad.  Also, we are already doing a terrific job of NOT saving enough for our future…we don’t need any more help with this.