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Obama Versus McCain And Your Retirement Savings

By Pinyo • Oct 19th, 2008

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

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.

5 Comments

  1. gravatar
    Jason, 20. October 2008, 9:03

    Politicians won’t come up with long term solutions because they know most people don’t care about anything other than the here and the now. We live in a populist age.

  2. gravatar
    BlueCollarDollar.com, 20. October 2008, 10:35

    We should also keep in mind that these are changes to tax regulations. By the time Obama actually takes office, only the unfortunate few will still be reeling over the credit mess. This makes no solution, even in the short-term, very appealing or probable.

    Perhaps expanding the withdrawals to specific needs beyond what is currently allowed (college, first time home buyers), such as meeting current and past mortgage obligations or funding the cost of refinancing, using the assets in the 401(k) as collateral for those loans (which would mean blocking any further sales of investments in them and forbid reducing contributions below 3% of pre-tax income - 2% of which could go to repayment), and possibly even offering a government guarantee to businesses who continue to make or increase contributions and matches to the defined contribution plans to help the stem the temptation of selling.

    Dismantling the system as it is structured, even temporarily would have long range effects on anyone fifty years or older. Short-term solutions are simply crowd fodder and can be mostly ignored.

  3. gravatar
    Marsadie, 20. October 2008, 11:38

    Let’s be honest — the majority of voters want and want to hear the “bandaid” solutions. Unfortunately.

  4. gravatar
    Donny Gamble, 20. October 2008, 22:53

    I think chooses Obama will benefit your retirement savings down the long run. He will give you more incentive to invest in your future by lower your taxes on retirement savings

  5. gravatar
    Make Friends, Earn Money, 1. November 2008, 8:17

    Politicians will promise anything to get into power, but it is what happens afterwards that is important. I’ll wait to see how things work out after either is elected

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