A couple of bad ideas from Barack Obama in the last couple of days
Posted by Mike Sylvester - 10/16/08 @ 4:29 am - Filed Under 2008 National Elections, National Politics
Barack Obama has made a lot of policy proposals in the last few days.
I want to focus on two that make no sense to me; both of which I feel are terrible ideas.
The first is his call for a 90 day moratorium on home foreclosures. This makes no sense at all from an economic standpoint and would likely extend the real estate crisis in my opinion. Foreclosure is already a long and complicated process that costs thousands of dollars in legal fees. I have recently been involved in a limited way with four families in or near Fort Wayne who have homes that are being foreclosed on. Generally speaking they have come to me for tax advice concerning how the debt forgiveness will effect their taxes. (In many cases you have to count the debt forgiveness as taxable income on next years tax return)
All four of the families are heavily in debt and a 90 day moratorium on foreclosures will not enable them to save their homes unless:
- One of their relatives dies and leaves them a large inheritance that they can get to quickly.
- They win the lottery.
People whose homes are in foreclosure ALWAYS have a pile of other debts that they are also behind on; after-all, most people only stop paying on their homes when they have no choice.
A 90 day moratorium on foreclosures will hurt banks because they will get their property 90 days later.
Even worse is Obama’s second idea. He wants to allow Americans to withdraw up to $10,000 penalty free from their retirement over the next two years. Currently if you withdraw money from your retirement account early you have to pay a 10% penalty PLUS the amount withdrawn is taxable income. Obama’s plan removes the penalty and leaves it so the withdrawal is taxed as regular income.
Many retirement accounts have decreased between 30% and 40% in the last 13 months if they were invested in the stock market (As most are). It is a statistical fact that most Americans who would be able to withdraw money “early” from their retirement account already have insufficient money in their retirement account to enable them to retire. We need to encourage Americans to save more money, not less.
This plan is short sighted and backwards.
The 10% penalty exists as a barrier to “encourage” people to leave their money in their retirement accounts until they are 59 and one half years old.
Good grief.
Mike Sylvester
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2 Responses to “A couple of bad ideas from Barack Obama in the last couple of days”
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Mike — I agree that the mortgage proposal is questionable. However, it is almost certain that there will be some sort of help for over-leveraged homeowners, as both parties are pushing for action.
As far as the penalty waiver for early withdrawals, there has already been a huge increase in “hardship withdrawals”. Most of the people that do this are only in the 10-15% income tax bracket and the additional 10% penalty doesn’t provide that big of a barrier. I am all for encouraging retirement savings, but sometimes government can’t force people to do things they don’t want to do. I would be in favor of waiving the penalty, since it hits mostly those at the lower income levels.
Tim,
Why do you think that the people withdrawing their retirement savings early hail from the lower income levels?
I am honestly not sure what income levels the people are at; however, based on my personal and professional experience the people withdrawing the money are most often considered middle classed. Last year I had a client that made well over $100,000 per year withdraw money early from their retirement plan.
Mike Sylvester