Each major presidential candidate is making his presence known and ensuring his name is constantly in the media as next month’s election approaches. Recently, Democratic candidate Barack Obama announced six action steps to help heal the economy in this country and across the world. Five of these are “new” ideas, and one was originally proposed by Republican candidate John McCain.
1. Allow penalty-free withdrawals from 401(k)s and IRAs. For most early withdrawals from retirement accounts, the Internal Revenue Service assesses income tax as well as a 10% penalty. Obama would like to let these withdrawals in 2008 and 2009 slide without penalty. Income taxes would still apply.
This would benefit individuals already planning to make hardship withdrawals, or since the exemption would be retroactive to January 1, 2008, individuals who have already made hardship withdrawals. It shouldn’t be much of an incentive to choose a retirement withdrawals over other options, since the account owner would still owe income taxes on the amount of the withdrawal.
2. Don’t force retirees to take distributions from IRAs and 401(k)s at age 70.5. Normally, individuals are required to draw down their retirement plans. This is a good move when the market is significantly down from last year, as it is right now.
The required withdrawal amount for 2008 is a percentage of your December 2007 balance. Unfortunately, since the market has declined since December 2007, what was 10% of your balance in 2007 may be 20% of your balance today. Removing the forced minimum distribution will allow retirement nest egg balances to recover with the market, assuming the market does in fact recover.
3. Allow the Federal Reserve and the Treasury to lend directly to state and local governments. I’ve seen the yield on the Vanguard New Jersey Tax-Exempt Money Market Fund VNJXX), which invests in state and local bonds in my state decrease since I first invested in the fund a few weeks ago. This could be indicative of the financial problems that might affect this state.
This move could help stimulate local economies through giving states the ability to meet their obligations.
4. Provide a $3,000 tax credit in 2009 and 2010 to companies for every new employee they hire. This move has the possibility of offsetting the price of expensive American labor in comparison to workers oversees. But will this help create new domestic jobs? I’m not sure that $3,000 per hire is enough as an incentive.
5. Extend unemployment benefits and exempt the benefits from income tax. By adding 13 weeks to the unemployment coverage period, Obama intends to provide help for those unemployed for more than six months. Without the IRS collecting tax on unemployment benefits, unemployed workers will have more money to spend on necessities.
Unemployment rates are still historically low, even within this economic crisis. Is Obama preparing for higher unemployment if a recession continues? If the economy does not improve and more people find themselves out of work, will this plan still be affordable?
6. Any financial institute that accepts help from the government will place a 90-day moratorium on foreclosures. This would give the lender and borrower more time to work out an agreement, as long as the borrower is acting in good faith. I have mixed feelings on this. In many cases, homeowners made bad choices when purchasing houses they could not afford, but I can’t expect people to always know the financially correct decision when there was misinformation perpetuated by the mortgage industry.
I’ll take a look at McCain’s suggestions when I receive more information about his plans.
What do you think of Obama’s ideas?
Updated June 22, 2016 and originally published October 14, 2008.