Obama plan would increase early 401(k) withdrawals
Are you a fan of this potential drain on your company’s 401(k) plan?
In President Obama’s proposed 2016 budget, his administration included a provision that, if passed, would allow unemployed individuals to withdraw up to $50,000 from their individual 401(k) accounts penalty free.
Presently, early withdrawals (those made before age 59-1/2), are subject to a 10% penalty, plus income tax requirements.
The president’s proposal would eliminate the 10% penalty, but there are some rules attached to the plan.
The fine print:
- Withdrawals would still be subject to income taxes.
- Any person wishing to make a withdrawal must have received unemployment compensation for more than 26 weeks.
- Participants could withdrawal at least $10,000.
- If a participant has more than $10,000 in their account, the person could withdrawal half of their plan balance up to a total withdrawal of $50,000 per year. (For example: A person with $40,000 in their account could withdrawal $20,000. And if the person had $100,000 or more, they’d be allowed to withdrawal the maximum of $50,000).
- Participants would have to withdrawal the funds either in the year they received unemployment compensation or the following year.
It’s unclear how likely the provision is to pass (presidential budget proposals usually undergo significant changes), but NBC News is reporting the provision appears to have bipartisan support.
How the business community would react is another story altogether. Generally, employers do all they can to discourage early withdrawals, as they know what kind of damage they can do to employees’ and ex-employees’ long-term retirement savings.
