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Candidates Propose Temporarily Relaxing IRA Withdrawal Rules

  • October 16th, 2008

No group of Americans is feeling the plummeting value of stocks as acutely as retirees. Average retirement accounts -- IRAs and 401(k)s -- are down more than 20 percent from a year ago, according to the Congressional Budget Office. Retirees are seeing large chunks of their hard-earned retirement income evaporate before their eyes. Others who may have planned to retire soon are being forced to rethink their options.

Both Sens. Barack Obama and John McCain have responded to retirees' and near-retirees' deep concern by rapidly unveiling new policy proposals to temporarily relax some of the rules governing retirement account withdrawals, to allow easier access to funds and to shield older investors from being forced to sell assets in a down market.

Both candidates have proposed temporarily waiving federal rules that now require older Americans to begin withdrawing retirement account funds as soon as they reach age 70 1/2. Obama called on the Treasury secretary to allow the change by suspending a federal regulation.

But this change would likely benefit mostly wealthy retirees who can afford to leave their stock investments untouched, said Dallas Salisbury, president of the Employee Benefit Research Institute.

"The vast majority of individuals have relatively small account balances," Salisbury said. "So for more individuals, they would have had to start taking the money out long before 70 1/2."

For those who want to make withdrawals from IRAs and 401(k)s, McCain would tax the withdrawals at just 10 percent in 2009 and 2010. This is the lowest rate in the income tax code and would apply to the first $50,000 withdrawn. Under current law, income from retirement accounts is taxed at standard personal-tax rates.

As reported in The Wall Street Journal, "the Obama campaign questioned how making it easier to withdraw money from the market would stabilize the economy. If seniors are allowed to pay reduced taxes on their own withdrawals, 'how is that not capital flight, specifically for the wealthiest Americans who can move their money around?' asked Obama spokesman Tommy Vietor."

Obama, meanwhile, has proposed allowing Americans younger than age 59 1/2 to withdraw 15 percent of their retirement savings -- up to $10,000 -- without paying the usual 10 percent tax penalty, although they would still have to pay income taxes on the withdrawal. Countering critics who say waiving the penalty discourages saving, the Obama campaign argues that many Americans need the money to get by and should not be penalized when major financial institutions are getting bailouts.

Even before the recent economic turmoil, Obama's economic plan included a proposal to eliminate all income taxation of seniors making less than $50,000 per year.

For a CNNMoney.com article on the candidates' economic proposals, click here.

For a U.S. News & World Report blog entry on how Obama and McCain would change retirement accounts, click here.

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Last Modified: 10/16/2008

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