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Is this a good idea?
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OptimisticOwl Offline
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Post: #1
Is this a good idea?
Obama has proposed that the 10% penalty on early withdrawals be waived, on amounts up to 15% of value or $10,000, whichever is less.

Now everybody here has made up their mind on who they are going to vote for, and nobody will be swayed by fact or opinion, but I would like everybody's honest appraisal of this proposal, and why they think it is good/bad.

My first thought is that the maximum impact is $1000 saved on the tax penalty, not an amount that is likely to make in big difference to most people who have been employed long enough and well enough to have a 401K to draw from.

Second, the withdrawal is still subject to regular income taxes, so the net effect for someone in the 28% bracket is they will get $7200 to work with.

Third, since stock values have dropped, they will be selling low, and the sales would put additional downward pressure on the market.

Fourth, that is retirement money they won't have later on (plus the earnings from it).

Certainly there will be individuals who will need the $7200 +/- to pay their mortgage or some bills, but how long will that last? Are they buying 2-3 months at most?

Is this fix more cosmetic than real?
10-18-2008 09:50 PM
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Owl 69/70/75 Offline
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Post: #2
RE: Is this a good idea?
For individuals it will be a case-by-case situation. Unless you have a pressing need to take the money out, it is probably better to leave it in. Obviously if you do have a pressing need, it would be one option to compare against others.

For the economy as a whole, it is a bad idea. We don't have enough capital investment now. This would remove a bunch of it. A number of Obama's proposals seem to reflect a disregard for the importance of investment capital in growing and sustaining an economy. The results could be disastrous.
10-18-2008 11:07 PM
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erice Offline
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RE: Is this a good idea?
Owl 69/70/75 Wrote:For the economy as a whole, it is a bad idea. We don't have enough capital investment now. This would remove a bunch of it. A number of Obama's proposals seem to reflect a disregard for the importance of investment capital in growing and sustaining an economy. The results could be disastrous.

"Disastrous" seems a little over the top. Obviously for most of us, pulling money out of our 401k right now when the market is (hopefully) near its lowest isn't a great idea -- and yes, generally a reduction in investment capital isn't great for the economy. But for those who, for instance, have no choice but to take some money out of their 401k to pay their mortgage or risk foreclosure, not having to pay a penalty would probably help them out a bit. And if it saves a few houses from foreclosure then it's probably not such a bad thing for the economy too.

But I do worry about the incentive it creates to sell low.

(Though isn't Obama proposing a temporary moratorium on foreclosures, too? I guess the same principle applies to, say, individuals struggling to pay their car loans as well -- though that's a little weaker.)
10-19-2008 12:28 AM
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Owl 69/70/75 Offline
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Post: #4
RE: Is this a good idea?
erice Wrote:
Owl 69/70/75 Wrote:For the economy as a whole, it is a bad idea. We don't have enough capital investment now. This would remove a bunch of it. A number of Obama's proposals seem to reflect a disregard for the importance of investment capital in growing and sustaining an economy. The results could be disastrous.
"Disastrous" seems a little over the top.

Considering that the prior sentence made reference to "a number of Obama's proposals" and the verb in the particular sentence was "could be," then no, I don't think it is over the top at all.

Disaster is actually what I'm expecting, but I understated those expectations a bit for this post. I guess we just have vastly different expectations about either (1) where the US economy is today, or (2) what Obama's proposals will do to it, or both.

I would love to be able to see Obama's proposals as something that will help the economy, rather than 100% abject vote-pandering, but so far I just can't get there.
10-19-2008 07:26 AM
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OptimisticOwl Offline
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Post: #5
RE: Is this a good idea?
erice Wrote:
Owl 69/70/75 Wrote:For the economy as a whole, it is a bad idea. We don't have enough capital investment now. This would remove a bunch of it. A number of Obama's proposals seem to reflect a disregard for the importance of investment capital in growing and sustaining an economy. The results could be disastrous.

"Disastrous" seems a little over the top. Obviously for most of us, pulling money out of our 401k right now when the market is (hopefully) near its lowest isn't a great idea -- and yes, generally a reduction in investment capital isn't great for the economy. But for those who, for instance, have no choice but to take some money out of their 401k to pay their mortgage or risk foreclosure, not having to pay a penalty would probably help them out a bit. And if it saves a few houses from foreclosure then it's probably not such a bad thing for the economy too.

But I do worry about the incentive it creates to sell low.

(Though isn't Obama proposing a temporary moratorium on foreclosures, too? I guess the same principle applies to, say, individuals struggling to pay their car loans as well -- though that's a little weaker.)

If you have to pull out this money to stave off foreclosure, the $7200 or so will only buy you a few months. The difference between the $6200 with the penalty and the $7200 without is negligible. I think that while this measure will help some people in the short run, there will be a lot for whom it buys 3-4 months and then they are back in the same boat, only with less retirement savings.

The mortgage foreclosure suspension is limited to 90 days, and I question its fairness to the owners of the mortgage. This early withdrawal proposal is for two years, which brings up more questions. If it is such a good thing, why not make it permanent?

I think it is mostly cosmetic. It enables the number $10,000 to be mentioned.
10-19-2008 09:49 AM
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