What Happened To Obama 401K Withdrawal Plan?

During the 2008 US presidential election Senator Obama made some proposals to change the 401k rules to allow partial withdrawals.

Why did Obama propose changes to the 401k plan withdrawals?

In early September 2008 Fannie Mae and Freddie Mac were placed in conservatorship by the federal government. These “Government Sponsored Enterprises” were established by congress to help boost home ownership in the USA. At the time these agencies were put in conservatorship, they either owned or guaranteed over 50% of the country’s home mortgages. Since the mid 1990s Fannie and Freddie increased their ownership of sub prime mortgages. Sub prime mortgages are made to home buyers that are at high risk of default. When these sub prime mortgages started defaulting, Fannie and Freddie collapsed. The country was already in a recession so their collapse caused lenders to stop lending money. This led to bigger downturns in the US economy and the developed nations of the world soon followed.

How were these proposals supposed to help this situation?

401k plans are tax deferred retirement savings. In exchange for the tax deferral the 401k law provides a 10% penalty tax in addition to the regular income tax applied to the withdrawal. Obama’s 401k withdrawal plan would suspense the 10% tax on partial withdrawals. Theoretically, this would help people avoid foreclosure and boost the economy again. Unfortunately, the sub prime mortgages had “teaser” interest rates. They started at a lower than regular rate to encourage purchases. They also would adjust to changes in interest rates every 3 to 5 years. This created a scenario where the high risk borrowers got higher payments despite the economic slowdown.

What happened to Obama 401k withdrawal plan?

After the increased deficit spending for the bailout/stimulus, Congress decided the penalty revenue was needed and scrapped the plan.

Related posts

1. What Age Can I Start Withdrawing From My 401K Plan?
2. Can A Government Entity Setup A 401K Plan?
3. Do I Pay Taxes On My 401K?
4. What Are The Features Of A 401k Plan?
5. How Do I Withdraw From My 401K After 59 1/2?

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