I keep hearing from the candidates that it's the middle class that is the economic life blood of this country. So isn't it about time the government started asking the professionals who deal with small businesses , the professionals that understand the impact any new tax laws will have on the middle class -What would really make a difference to this economy-
CPAs like myself understand what has to be done-We are the ones who deal with businesses everyday and understand what is needed.
The 750 Billion Dollar Bailout does nothing to immediately help homeowners make their mortgage payments. It also does nothing to create discretionary spending- which is what this country will need to stimulate the economy again and get it out of a recession. YES- we are in a recession and you don't need a 900 point drop in the Dow Jones to comfirm that. Just look around at empty storefronts in your town. If individuals are burdened with debt payments, they can't go out and spend. If they can't go out and spend- businesses close their doors.
Do you really believe that when the Federal government gives the banking system additional capital that the banks are going to automatically start loaning out money to businesses or make it easier for individuals to buy a home? Not a chance. This may save us from a catastrophic depression but it will not ease up credit overnight on Main Street. It will take years for the pendulum to swing again in the direction where banks will be giving small businesses credit lines based upon the credit worthiness of the individual owners of the business.
The Bush Economic stimulus check was a total waste of money and a really dumb idea- TWICE dumb. It was like a pimple on an elephant's butt. What individuals need to do is eliminate debt with dollars they don't need now. With dollars they technically don't even have access to now.
MY PROPOSAL IS: ELIMINATE THE TAX TEMPORARILY ON TRUSTEE TO TRUSTEE DISTRIBUTIONS FROM IRAS, 401ks AND OTHER QUALIFIED PLANS WHEN THE MONEY IS USED TO REDUCE OR ELIMINATE DEBT ON PRIMARY RESIDENCES THAT WAS IN PLACE AS OF DECEMBER 31, 2007.
Yes- not just eliminate the penalty for early distribution, eliminate the entire tax consequence. The theory is that many 401ks and IRAs are down in value as much as 40% anyway. If you could go back in time a year ago, you could of taken out your IRA, paid a 10% penalty if you were under 59 1/2 and pay the tax and use the remainder to pay down your debt. That penalty and tax burden could have been more than 50% in some states. So by allowing individuals to reduce their debt tax free- it 's like the government gave them back all the money they lost in the market over this last year.
Most important is that by reducing the debt of these homeowners- banks will be in better shape (loans will be reduced in proportion to restated real estate values) and homeowners as consumers will have discretionary dollars available again since their debt burden has been reduced or eliminated. Improved cash flow now equates to discretionary dollars.
Some would argue that we are stealing the future of America's retirement. Nonsense - this is a totally elective gift. Essentially- the government is partnering with individuals to reduce their debt. Right now- with the market down as much as it is - most baby boomers won't be able to retire anyway.
Others will argue that this will put additional pressure on the equity markets. This may be true for a very brief period- but when stocks get low enough- buyers and new money will come out of the woodwork and snatch up the bargains.
In Summary- The government and the consumer have both been living on a deficit budget. This needs to change. The middle class is sitting on a hidden asset that if they could tap into - would allow them to reduce or in fact eliminate debt in many cases. Because credit markets will remain tight for many years to come , individuals must learn to live within their budget constraints. Tax-free distributions from retirement plans could be the shot in the arm this economy needs to jump start this economy again under these new economic rules.
LIKE THIS IDEA? HAVE A BETTER IDEA?
LET ME AND EVERYONE KNOW WHAT YOU WOULD DO TO FIX THIS MESS.
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28 comments:
One idea I have is to take the economic stimulus money (or a part of the bailout funds) and apply it to personal credit card debt. This will give additional funds to the banks and financial institutions to help stablize their position and it will reduce personal debt.
Excellant idea!!!!!!!!!!!!!!!!
Excellant!!!!!!
Excellant!@!!!
Excellant!
Your first proposal to have the government consult with professionals is probably the best, but probably also will not happen. Tax free distribution is an excellent idea and definitely should work.
A great idea, trustee to bank transfer, we have the precedent with current transfers, and to eliminate so much personal debt would be tremendous for our economy. Let's do it!
I do not agree with this proposal.
First,if you do not liquidate at this time you have lost nothing. The market will come back in time.
Second, IRA and 401K's are supposed to be used for retirement. If you provide a vehicle to withdraw principal with no tax effect, there will be no funds available when retirement time arrives.
Great practical idea. I'm for it.
If we truly believe in capitalism and a free market economy as the most successful path toward social and economic success, there are several conclusions that are readily apparent. First, we must look to the basic fundamentals underpinning economics, which indicate that the business process is inherently cyclical. There are good times, and there are bad. Periods of expansion and growth inevitably will be followed by periods of stagnation. The economy has been on such an overall upswing for so long that people forgot that stagnation and retraction must accompany growth, even in the best-trending economic models.
This particular "crisis" occurred for two basic reasons. First, we had a long period of economic expansion that had to be normalized. Second, the housing bubble had many more implications and attachments than any of the previous bubbles. When the tech bubble burst, shares in overinflated tech stocks came crashing to earth. Yet, other than losing a significant financial investment in a particular equity class, the implications were otherwise limited. A significant decline in overinflated real estate values had a much wider reach because of all of the related industries, vague derivative hedges, and other economic implications. Most of the economy was in some way tied into real estate, as it has been since the agrarian revolution and the end of the nomadic period for humankind. The simple fact was that real estate was significantly overvalued, and the market made a correction. This shows that the free market is functioning correctly, and that there no "problem" exists. The wide-ranging implications are unfortunate, as is the simultaneous correction after a period of significant expansion. However, the market must be left to its own good and proper function. Further intrusion and government intervention into the free market will only hinder the economy of the future. The government bailouts are tantamount to giant, incredibly expensive corporate social welfare programs. Businesses must be free to succeed and free to fail, no matter how large. It is the fundamental basis of a free market economy upon which our capitalist system rests. The only question that remains is...do we truly believe in it, in good times and in bad?
You're assuming that these portfolios have enough value to borrow against! I agree with the individual below - you have not lost anything until you liquidate and where will the money come from to replace these "free" loans for retirement? The taxpayers again, I suppose. The problem is the American economy is based on consumerism (is that a word?)-we spend above our means and expect the government to bail us out when we get in over our heads. Sometimes we have to accept that there are consequences to our actions and accept responsibility for our mistakes. Until we fix our over-spending problems and learn how to budget, we will never fix the problem. Throwing more money at it won't make it go away.
I think this is an excellent idea. Ideally these funds are for retirement. Yet when all other measures are exhausted, sometimes early distributions are the only option. When people have lost their jobs and used up savings, in order to keep their homes, they must use retirement funds. Time for us to get our heads out of the sand and put in place options that truly work!
I like it, but believe a totally tax free withdrawal would be a mistake. A more viable alternative could be to cap the federal tax rate at 10% and waive the penalty. Additionally I think there needs to be a withdrawal ceiling of say $150,000 tops, as well as an AGI threshold of say $300,000. This should not result in a strategy for wealthy folks to draw down on significant retirement accounts at a preferential rate, or worse tax free.
I disagree. The economy goes up and it goes down. It's going down now. It can not always go up.
What happens when the IRAs 401Ks
run out, who is going to pay for their future retirement?
Pay down credit card debt so they can run up their debt again.
Here's an idea. How about cancelling all credit cards that have a balance over $30,000.
Health Care mess. Eliminate the 7.5% floor before one is allowed to deduct medical expenses on Schedule A of the 1040.
In order for this plan to work, banks must be required to renegotiate the mortgage payment amount when the IRA-funded payoff is made. Currently, when one makes an additional principal payment on a mortgage debt, the future interest/principal split and the number of years remaining changes, but the mortgage payment does not. If the mortgage payment doesn't change, there can be no additional spending by the homeowner.
I would also like the Treasury to revise IRA rollover regs that seem to favor liquidation for rollover rather than a transfer of the existing mutual fund shares.
Unmeployed people who need rollover their 401K plans as a contingency for access to these funds are forced to buy high and sell low.
Further, the capital loss incurred in this transaction is never recognized.
Actually I am surprised that a CPA would propose that individuals should be allowed to access their retirement accounts for purposes other than retirement. Take this proposal to its inevitable conclusion and guess what happens when these people retire. You and I, and the rest of the taxpayers, have to support them. Let's deal with the issue now, rather then put it off for another day. That is the CPA way of doing things or at least the way I was taught when I went to school.
I agree with the Tax free distributions on IRAs & 401Ks as well as forgoing the penalites. I also think the Appraisl Industry need to be more regulated. House should not be appraised at comparative sales they should be appraised at a value and adjusted every year by a percentage of growth so that the hugh equity in homes does not mount up beyond an un relistic value.
Need to be able to delay the required minimum distributions from retirement plans.
Also helpful would be to look at IRA's and retirement plans together and permit distributions from any source (the way it now works for IRA's).
While I understand the sentiment, as both a CPA & CFP I disagree with this one-time tax-free distribution idea for two main reasons: 1) as other bloggers have said, this would go against the purpose of setting up these accounts in the first place, and 2) would incent people to liquidate their long-term holdings at the worst possible time - the market will come back up; it always has. I have a different idea:
Let's once and for all, do a one-time fix of the Alternative Minimum Tax formula so that it's indexed for inflation all the way back to inception of the tax, in 1969 (did you know it had been created then to target just 155 high-income households??). Then have taxpayers claim an AMT credit for all the ill-gotten taxes collected by the IRS all these years. Then make AMT indexing for inflation into law (not discretionary) going forward. That would liberate millions of middle-income taxpayers from the clutches of this heinous tax allegedly designed to tax the very rich, and provide a real stimulus package to those who earned it with their hard work. It would also indirectly help states collect millions more in income taxes, as it would create a strong incentive for people not to cheat on their federal tax deductions in order to try to "beat" the Federal AMT beast.
TAX FREE DISTRIBUTIONS FROM IRS & 401K'S FOR "ANY PURPOSE" THROUGH JUNE 30 2009.
* STIMULATE ECONOMY
* INCREASE "CONFIDENCE"
* OTHER REASONS YOU USE
FUTURE IRA / 401K DEFERRALS. TAX FREE GOING IN / TAX FREE COMING OUT. MUST BE IN 401K PLAN FOR SOME TIME PERIOD, SAY 5 TO 10 YEARS.
Interesting idea. I also think that they should temporarily suspend RMD's for seniors. Why should our retirees be forced to lock in market losses?
Also - instead of government bailing out bad mortgage debt - have the mortgage companies refinance the loans over a longer term. Give them a 40-50 year amortizaiton. When the R/E market recovers they can sell the underlying asset and pay off the debt. I have a real problem with the American people having to foot the bill for greed on both sides of the lending table?
Great Idea! It provides needed stimulus now, without an immediate federal budget ramifications.
Some poster suggest this would incent people to sell at the worst time, when prices are down. Two points. First, that is happening anyway, people liquidating mutual fund investments is forcing managers to sell which is driving down the price. More imporant though, the elimination of tax and penalties for the early withdrawal offsets the investment loss. Further, the money saved on debt service can be spent to stimulate the economy, or invested in equities at deflated prices to replenish retirement accounts.
Simply put, I like it a lot, i have thought this would be the best plan for a year now. I have many client considering this idea even with the tax.
This is a great idea and needs to be sent to every US Senator and Congressman, as well as to the White House for their consideration. However, there needs to be modifications as suggested by several of the commentators, such as dollar limits (withdraw no more than delinquent balance or outstanding mortgage, Banks must revise terms as a condition of payment, etc.) Even if a small percentage of homeowners with 401k's and IRA's took advantage of the opportunity, it would still be a win-win situation. Who is going to lead this initiative?
I think that is a great idea. I would pay down on my mortgage & refinance so that my payments would be less & I could afford to make the payments & keep my house. I am currently using my savings for the house payment, but that will run out soon.
Tax free IRA withdrawals to pay down taxpayers home mortgage is a great idea (with dollar limits to help elliviate too much pressure on the stock market) - it would give people a chance to honor their original contract rather than walk away. When the housing market comes back (which everyone thinks it will eventually) then that equity is part of your retirement - so what is the difference if it is in your home or your IRA???
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