Wednesday, October 28, 2009

A bailout for the average investor

From the 26 October Greater Niagara Newspapers

By Bob Confer

It seems like every special interest group has received a bailout during the Great Recession. Bankers were awarded trillions to keep their enterprises afloat. Teachers and other government workers were able to keep their jobs through federal funding. Even senior citizens have been earmarked for a one-time cash payment that makes up for the lack of growth in Social Security disbursements.

All of those groups represent only a small portion of the many who have received bailouts. Sadly, one group, the largest and most important of them all – the average family – has been left out in the cold. John and Jane Doe haven’t been awarded extra spending money or a little financial security. Unlike those who have, they remain either unemployed or underemployed or fearful of their future earnings and expenses.

They need a bailout of their own. But, just like the others who have already received bailouts (more aptly called "handouts") from the tax coffers or the infinite fiat money supply, they don’t deserve to have other people’s money thrown at them. Rather, they should buck the trend and be bailed out by their own money. Such a self-funded bailout can be garnered through immediate access to funds that are rightfully theirs: Monies that are so close yet so far away in their 401(k) accounts.

Most folks who have a 401(k) won’t touch it for fear of being penalized. By law, if someone under the age of 59 and a half dips into a 401(k) it is considered early withdrawal and the individual must pay a 10 percent penalty (an excise tax, really) to the federal government on top of the income taxes that must be paid on the 401(k). That’s a huge hit, whether someone has $10,000 or a $100,000 in their account.

One can understand having to pay the income tax portion since it was a pre-tax investment extracted from their paychecks. One can almost see the logic behind the penalty; it’s a means to reinforce that 401(k) plans are long-term, retirement-focused plans and not short-term options. But, one can also see the penalty as being an odious government cash grab that - especially in times of need such as this recession – hurts the average person.

My proposal is this: The government should temporarily abandon, say for a one or two year period during this economic crisis, the 10 percent tax, allowing investors to take a one-time withdrawal without penalty. Think of the number of baby boomers who could have saved their nest eggs during the stock market collapse if this were the case. More importantly, think of the many households that up until a year ago were two-income households and are now single-income (or no-income) homes that could really use their 401(k) money now. Many in the financial sector would consider that to be a foolish use of money, but they really need to be empathetic. In this job-sucking recession those families don’t care about their income 30 years down the road, it’s now that matters most and they need the money to feed their kids and keep a roof over the heads.

Surprisingly, I haven’t heard this simple yet effective idea for getting cash into peoples’ hands broached by anyone in Washington or the pages of the national press. Therefore, I plan to turn this into a little experiment in active citizenship. I’ll share the concept with the powers-that-be and I’ll let you know how it is received. Hopefully, it’s accepted with open arms so you can have access to your money – when you need it most - without getting penalized for it.

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