Present stimulus proposals offer too little to help unemployed people save their homes or start businesses that will add to the nation’s employment base. A waiver of retirement account withdrawal penalties is a direct, fast, and effective way to meet these urgent needs. Precedent for such a waiver exists in the aid given for recovery from Hurricanes Katrina, Rita and Wilma. IRA withdrawals by people under age 59½ following these disasters are not subject to the ten percent withdrawal penalty and can spread any taxes due over a three year period. The magnitude of our manmade economic crisis is as devastating for several times as many Americans as those natural disasters and equally strong measures are required for our recovery.
In normal economic conditions, the penalty on early withdrawals deters abuse of the tax deferral of the accounts and reimburses the Treasury for the periods during which the accounts were able to earn income without taxation. The penalty does not accomplish this latter intent following market losses over the last eighteen months that have wiped out much, if not all, of those expected gains. Unemployed people without other resources already have a double penalty of job loss and forced withdrawals from depleted retirement accounts they can not afford to leave alone to recover lost values in an improved economy; increasing their tax burden with the early withdrawal penalty is counterproductive to their current and long-term financial health.
National unemployment benefits average only $292 per week, 39% of the 2007 average hourly wage of $18.62. These payments are barely adequate to purchase food and fuel for most families and leave nothing for keeping up with mortgage payments. Since homebuyers can make penalty free retirement account withdrawals to purchase a home, it is only good sense that withdrawals to save a home from foreclosure receive the same tax treatment, especially when this relieves pressure on the Treasury and banking system by preventing additional mortgage defaults.
The Small Business Administration estimates that since the mid-1990s, small businesses have created 60 to 80 percent of net new jobs. The stimulus proposals build on this trend with provisions for small business loans; however, in present conditions this traditional form of business assistance is less likely to achieve the intended results. Losses of home equity and the upside down situation of mortgages greater than home values leave nothing for collateral when approaching SBA lenders who have been reluctant to lend to new businesses in the best economic environments. Maxed out credit cards and historic low savings rates leave many unemployed Americans without resources other than retirement accounts for starting a business as an alternative to a desolate job market.
Access to retirement savings without an unnecessary withdrawal penalty lowers capital costs for new businesses by eliminating lending fees, appraisals, and the burden of interest payments. Congress can give these new businesses their best chances for success by waiving a penalty as they transfer their investments from the stock market to their new companies while preserving the homes that shelter these new businesses and the families depending on them.
