Obama’s 401k Plan Is Nothing More Than a Junk Bond (Or If Obama Is Elected Kiss Your 401k Goodbye!) {Update}

I am going to do two things in this article, cover Obama’s retirement plan and an overview on 401k loans because I listened to Obama on retirement savings, realizing he doesn’t have a clue. Here is Obama’s plan from The New York Times:

He said he would seek to allow Americans of all ages to borrow from retirement savings without a tax penalty.

Let’s look at an overview of 401ks and loans from 401khelpcenter.com:

401k Plan Loans – An Overview

Allowing loans within a 401k plan is allowed by law, but an employer is not required to do so. Many small business just can’t afford the high cost of adding this feature to their plan. Even so, loans are a feature of most 401k plans. If offered, an employer must adhere to some very strict and detailed guidelines on making and administering them.

The statutes governing plan loans place no specific restrictions on what the need or use will be for loans, except that the loans must be reasonably available to all participants. But an employer can restrict the reasons for loans. Many only allow them for the following reasons: (1) to pay education expenses for yourself, spouse, or child; (2) to prevent eviction from your home; (3) to pay un-reimbursed medical expenses; or (4) to buy a first-time residence. The loan must be paid back over five years, although this can be extended for a home purchase. (Note from author: In some 401ks, the maximum payback length is 5 years but can be as little as 1 year.)

If a participant has had no other plan loan in the 12 month period ending on the day before you apply for a loan, they are usually allowed to borrow up to 50% of their vested account balance to a maximum of $50,000. If the participant had another plan loan in the last 12 month period, they will be limited to 50% of their vested account balance, or $50,000, minus the outstanding loan balance in the preceding 12-month period, whichever is less.

Because of the cost, many plans will also set a minimum amount (often $1,000) and restrict the number of loans any participant may have outstanding at any one time. (Some 401ks allow a maximum of 2 loans at one time.)

Loan payments are generally be deducted from payroll checks and, if the participant is married, they may need their spouse to consent to the loan.

While interest rates vary by plan, the rate most often used is what is termed the “prime rate” plus one percent. The current “prime rate” can be found in the business section of your local newspaper or the Wall Street Journal.

Funds obtains from a loan are not subject to income tax or the 10% early withdrawal penalty (unless the loan defaults). If the participant should terminate employment, often any unpaid loan will be distributed to them as income. The amount will then be subject to income tax and may also be subject to 10% withdrawal penalty. A loan can’t be rolled over to an IRA.

Just because you can obtain a loan from your plan doesn’t mean it is always the best idea. So before sticking your hand in the cookie jar, you should consider the “pros and cons,” some of which may surprise you. And remember, the purpose of a 401k plan is to fund your retirement, so don’t shortchange your golden years by treating it as a checking account.

From the overview:

One more time.

Funds obtains from a loan are not subject to income tax or the 10% early withdrawal penalty (unless the loan defaults). If the participant should terminate employment, often any unpaid loan will be distributed to them as income. The amount will then be subject to income tax and may also be subject to 10% withdrawal penalty.

And what is Obama’s plan?

He said he would seek to allow Americans of all ages to borrow from retirement savings without a tax penalty.

Americans of all ages can already borrow from retirement savings (401ks) without a tax penalty. The only penalty occurs when unpaid loans remain upon termination of employment.

Obama’s retirement loan plan offers nothing new to Americans because it is already exists in the laws surrounding 401ks.

Update:

There are plans and discussions underway in Congress to find a way to tax your 401ks and IRAs because they view these accounts as wasted because they are not taxed. And Obama supports this as another means of wealth redistribution. Take the retirement accounts away from hard working Americans and give it in the form of tax welfare….not tax cuts!

From the Freepers in the following post, “Congress mulls major 401(k) changes (The Obama Retirement Ripoff of 2009)”:

A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.

Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans.

This was suggested by the chairman of the House Committee on Education and Labor.

“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.

“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.

When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.

“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said.

That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.

“If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,” Ms. Ghilarducci said.

Pay attention! Anyone who has a 401k will lose it to taxation! Now Obama and his cabal of Democrats in Congress are trying to take away our retirement accounts! And another thing I don’t want the government telling me what I can buy (government bonds) for my retirement.

Fellow freepers, can someone get this to the McCain dudes. If Obozo wins, we are going to lose our 401k’s. They will be taxed away and or used to shore-up social security. These thieves will say it is the ‘fair’ thing to do…

I am including an update on this piece I wrote because I have another reference piece for you to read. The piece and quote come from Investment News.

“If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets,” Mr. Belluardo said.

“This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, Calif., advisory firm Trovena LLC, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said.

The Profit Sharing/ 401(k) Council of America in Chicago, which represents employers that sponsor defined contribution plans, is “staunchly committed to keeping the employee benefit system in American voluntary,” said Ed Ferrigno, vice president in the Washington office.

“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said.

No legislative proposals have been introduced and Congress is out of session until next year.

However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.

The most important part of the quote is the first line. Any of these proposed changes in my opinion would certainly halt employer matches to employees savings. In short chances are an employee would stop saving too!

I will say this agin, I do not and you should not want the government to have any part of your retirement savings. The Democratic Party (Socialist Party) leadership in Congress wants the following:

Under Ms. Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3% a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

“I want to stop the federal subsidy of 401(k)s,” Ms. Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

This plan means bigger government. Stop the Democratic Party leadership in Congress. Don’t allow them to get a stranglehold on our retirement accounts. Vote McCain…he isn’t willing to bet our retirement dollars on a larger government.