The election is over and the message is clear - the economy is priority one. The big question now is how some of President-elect Barack Obama's campaign proposals will affect retirees and workers with 401(k) and other retirement accounts. Looking at them a bit closer may reveal some clues.
Q: What are some of the ideas Obama has proposed that could impact my retirement planning?
A: One issue Obama has endorsed may get serious consideration before he takes the oath of office in January.
Obama 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 70 1/2. 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, the Washington-based group that represents 39 million people aged 50 and older, also has urged Paulson to take the action 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, rather than letting them keep their money in the account to potentially recoup the losses when the market improves.
Department of Treasury spokesman Andrew DeSouza said Wednesday he had nothing to report on the issue and declined to comment further.
"There's absolutely no reason to force people to take out a larger share of their current account at the bottom of the market," said Monique Morrissey, an economist with the Washington-based Economic Policy Institute. "It doesn't make any sense at all."
Ethan Kra, chief retirement actuary for business consultant Mercer, agreed with the idea of suspending the mandatory withdrawals.
"We're seeing the greatest poverty among those who are the oldest," he said. "I understand the IRS wants its money sooner rather than later, but you really don't want people spending all their money in their early retirement years and not having it in their older years."
A second proposal made by President-elect 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, but 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.
"I know people are feeling pain, but if you raid the piggy bank every time there's market downturn or recession, you will not have enough left in the piggy bank for old age," Kra said.
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.
Michael T. Townsend, vice president of legislative and regulatory affairs for Charles Schwab & Co. Inc. said Thursday that Congress could include the penalty-free withdrawal and required minimum distribution freeze ideas in a proposed new economic stimulus package expected to be considered if not in the lame-duck session of Congress, perhaps early in the next session.
"Obviously the financial crisis and the impact that has had - and that the market downturn has had - on people's retirement savings, has really brought this issue much more to the forefront than we might have thought even a few months ago," Townsend said. "There's going to be a lot more attention paid to it."
Obama's organization was moving quickly this week from campaigning into planning the White House transition and the level of priority to be placed on the retirement issues wasn't immediately clear. Obama spokesman Tommy Vietor declined to comment Wednesday.
Townsend, who is based in Washington, said the excitement of the historic election is softened by the troubled economy, which was reflected in Obama's acceptance speech. "I was really struck by just the tone that he set in that speech, which I think was acknowledgment to the reality of the economic state that he's going to be inheriting."
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