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The IRS should waive the 10% early withdrawal penalty on the use of IRA funds for cases of chronic un/under-employment

The IRS should waive the 10% early withdrawal penalty on the use of Traditional and Roth IRA funds for cases of chronic unemployment and under-employment until the economy reaches a recovery level (suggested here at 6% unemployment for 12 mo rolling period) where saving for retirement can continue again.  Ideally, this waiver should have started in 2008 or 2009 to be fair to all US citizens impacted by the financial crisis, but it should at least start with the 2011 tax filing.  Please sign a petition to the Whitehouse.gov at: http://wh.gov/BrS

US unemployment and under-employment is estimated at 15-16% of the workforce or approximately 23 million US citizens based on current Census and Bureau of Labor statistics.  Since those filing for unemployment benefits is currently estimated at 3% this leaves roughly 13% or nearly 19 million individuals who while trying to meet their current expenses are going into debt, selling all possessions, finding other unconventional resources, retirement resources or with all that failing becoming homeless and falling to reliance on charity.  If any of these 19 million individuals are using their retirement funds to meet expenses and are under the age of 59 1/2, they are required by the IRS to pay a penalty of 10% on early withdrawal.  This penalty is an unnecessary artifact of a time when the government believed these funds could accumulate tax-free for future use and represented a possible tax loophole.  Under current conditions, when the government is looking for easy ways to assist US citizens under financial stress, this is one simple fix to the tax code to assist.  It is important to note that due to the financial markets sustaining multiple episodes of stock market and securities losses since 2000, many of these IRA accounts have been and are experiencing losses.  Some have lost as much as 100% of their accounts.  With the current volatility in the market, it is not certain that funds will be available for future retirement purposes.  Withdrawing funds that remain in these accounts from the financial markets could be a better use than gambling on the current market instability.

Therefore, given the severity of the current financial crises and the great uncertainty of the investment markets, it seems appropriate to provide federal assistance by waiving the 10% penalty for a period of time until financial recovery and un/under-employment reaches a recovery level (maybe a 6% unemployment benchmark – the average US unemployment from 1960 to 2011).  If It is important to establish eligibility, here are two possible suggestions for eligibility for a waiver of penalty on IRA funds early withdrawal:

-          Duration of time of Unemployment exceeds unemployment benefits time of eligibility.
–          Eligibility determined by total income – possibly determined by a graduated table incorporating Level of Poverty and average annual US income (see below).

2011 HHS Poverty Guidelines

IRA Waiver Eligibility

 

Persons

48 Contiguous

Alaska

Hawaii

US Avg Poverty

X poverty

Total Income Limits

 

in Family

States and D.C.

 

1

10,890

13,600

12,540

12,343

3.60

44,410

Avg US income

2

14,710

18,380

16,930

16,673

3.45

57,580

 

3

18,530

23,160

 21,320

20,845

3.39

70,750

 

4

22,350

27,940

 25,710

25,145

3.34

83,920

 

5

26,170

32,720

 30,100

29,445

3.30

97,090

 

6

29,990

37,500

 34,490

33,745

3.27

110,260

 

7

33,810

42,280

 38,880

38,045

3.24

123,430

 

8

37,630

47,060

 43,270

42,345

3.23

136,600

 

For each additional person, add

3,820

4,780

4,390

4,330

3.00

12,990

 

Current IRS waivers on use of these funds:
IRS Topic 557 – Tax on Early Distributions from Traditional and ROTH IRAs
http://www.irs.gov/taxtopics/tc557.html

Distributions that you roll over or transfer to another IRA or qualified retirement plan are not subject to this 10% additional tax. For more information on rollovers, refer to Topic 413.

There are exceptions to this 10% additional tax for early distributions that are:

-          made to a beneficiary or estate on account of the IRA owner’s death
–          made on account of disability
–          made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
–          qualified first-time home buyer distributions
–          not in excess of your qualified higher education expenses
–          not in excess of certain medical insurance premiums paid while unemployed
–          not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
–          due to an IRS levy, or
–          A qualified reservist distribution

This proposal would add:

-          use of funds due to the US economic crisis to  meet necessary expenses.

Sign the Petition to the Whitehouse at:  http://wh.gov/BrS

Thank you for reading, considering, promoting and enacting this proposal

1 http://www.bls.gov/news.release/empsit.t15.htm
2 http://www.dol.gov/opa/media/press/eta/ui/current.htm
3 http://data.bls.gov/timeseries/LNS14000000
4 http://www.bls.gov/oes/current/oes_nat.htm#(2)
5 http://www.irs.gov/taxtopics/tc557.html

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