We've received several e-mails from readers who say they're facing difficult times financially and want to know the status of Obama's pledge to ease penalties for early withdrawals from 401(k) retirement plans.
As of this writing, the measure is not in the stimulus bill, nor in any other legislation that we could find.
The rules for hardship withdrawals are complicated and can vary depending on your employer's policies and how close you are to retirement. But in general, you can withdraw money early if you have no other source of money and can document a specific hardship — medical bills, impending foreclosure, college expenses and other things. (See detailed guidelines from the IRS on
hardship withdrawals
.)
But people who take hardship withdrawals pay a price. They are taxed on the money at the regular rate, and then pay an additional 10 percent penalty on top of that.
Besides that, the money won't earn compounded growth to build wealth, and during these economic times, early withdrawals lock in market losses that might turn around in time.
Obama proposed eliminating the penalty (but not the regular taxes) on hardship withdrawals, and making it retroactive to 2008. If passed, that could help people who will have to pay taxes on money they've already taken. But as we said, the measure is not in the stimulus bill.
"
It's not a slam dunk at all in Congress, because there's continuing concern about access to retirement funds before retirement," said
Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401K Council of America, an association that represents employers that sponsor 401(k) plans.
His group is ambivalent about lifting the penalty temporarily. People are facing tough times economically, but the measure might encourage people to take money out of funds that they might not take otherwise.
"
It should be an absolute last resort," he said.
"On the other hand,
if it's a matter of losing the house, feeding the kids, or a health emergency, you're going to do it anyway."
He said it's hard to tell if the matter will be addressed in later legislation, because it's not clear why it didn't end up in the stimulus bill. If it's passed later in the Congress, it could be made retroactive.
Obama proposed lifting the penalty on hardship withdrawals as part of an overall agenda to turn the economy around. Some of his proposals, such as a tax cut for workers, made it into the stimulus package, but others have not. It seems early to rate this item Stalled without more evidence. The primary reason we're checking this item now is because readers have e-mailed us and asked us if it was in the stimulus bill. We found that it's not. No Action.