The Obama administration has backed down on a high-profile campaign pledge to temporarily waive the tax penalty on individuals who take an early withdrawal from their retirement accounts, according to senior Treasury officials on Monday.
One senior official said the proposal, developed by the Obama campaign in the weeks leading up the general election, will not be part of the President’s 2010 budget, adding “there has been a lot of crystallization of tax proposals and tax relief proposals since then.”
Under current tax law, taxpayers under the age of 59 who withdraw funds from an Individual Retirement Account (IRA) or 401(k) plan must pay a 10% penalty, in addition to regular taxes.
At the height of the campaign, Obama promised to temporarily suspend the penalty on early withdrawals, up to a $10,000 limit. “This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college,” he told an audience in Toledo, Ohio where he released his “Rescue Plan for the Middle Class,” a seven-page document that included the proposal.
Under the heading “Penalty-free hardship withdrawals from IRAs and 401(k)s in 2008 and 2009” the document reads: “Obama is calling for legislation that would allow withdrawals of 15% up to $10,000 from retirement accounts without penalty (although subject to the normal taxes). This would apply to withdrawals in 2008 (including retroactively) and 2009.”
He also emphasized the proposal as one of four specific action items for the middle class during a debate with Republican nominee Sen. John McCain.
“Let's allow them to access their IRA accounts without penalty if they're experiencing a crisis,” he said during the third presidential debate.
Senior Treasury officials downplayed the campaign pledge, saying there has been little interest in the proposal since the election. They also disputed the notion that many taxpayers relied on the pledge in deciding whether to take an early withdrawal from their retirement account.
“That was something suggested before the election as a potential measure,” said the senior Treasury official. “It’s not been something that’s gotten a whole lot of discussion since then.”
Another senior official said on Monday that the administration would consider “taking another look at the idea” if there was interest on Capitol Hill.
