The election is over and the message is clear – the economy is priority one. The question now is how some of President-elect Obama's campaign proposals would affect retirees and workers with 401(k) and other retirement accounts. Looking at them a bit closer may reveal clues.
Q: What are some of the ideas Obama has proposed that could impact my retirement planning?
One may get serious consideration before Obama takes the oath of office in January.
He proposed a temporary suspension of the required minimum distribution rule, which forces tens of millions of retirees to take money out of their IRA and 401(k) accounts once they turn 701/2. The rule is designed to give the government its share of the taxes on the money, which has been accumulating tax free. Failure to take out the money results in a 50 percent penalty assessed by the IRS.
Suspending the mandatory withdrawal would allow people to keep the money in the account and possibly recover some of their losses when the market recovers.
Obama's plan would temporarily waive the penalties and taxes on withdrawals made after age 70 1/2. There's interest in Congress to get it done – sooner rather than later.
The chairman of the House Committee on Education and Labor, Rep. George Miller, D-Calif., has asked Treasury Secretary Henry Paulson to suspend the tax penalty immediately.
AARP, that represents 39 million people aged 50 and older, also has urged Paulson to move right away.
David Certner, the group's legislative policy director, said the required withdrawals essentially force retirees to take money out of the market at the bottom, recording large losses.
Department of Treasury spokesman Andrew DeSouza said recently he had nothing to report on the issue and declined to comment further.
A second proposal by Obama would allow workers to make hardship withdrawals of up to 15 percent of their balance from individual retirement accounts or 401(k) plans this year and in 2009. A withdrawal of up to $10,000 would not be subject to the 10 percent early withdrawal penalty charged by the IRS. Normal income tax would be due.
Some economists believe too many 401(k) plans already are underfunded and too frequently tapped for loans or early withdrawals, and making such a change sends the wrong message.
Other reforms Obama has supported include:
Eliminating income taxes for seniors making less than $50,000 a year. This would provide an immediate tax cut averaging $1,400 to 7 million seniors and relieve millions from the burden of filing tax returns.
Creating automatic work place pensions by requiring employers who do not currently offer a retirement plan to enroll workers in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. Employees may opt out if they choose.
Matching 50 percent of the first $1,000 of savings for families that earn less than $75,000 a year. The savings match will be automatically deposited into designated personal accounts.
Regulating pensions more strictly by ensuring that bankruptcy courts cannot use pension funds to pay creditors ahead of some other company assets, prohibiting companies from giving executive bonuses while cutting worker pensions, and limiting the circumstances under which retiree benefits can be reduced.