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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, May 9, 2011

Hewitt: Waiving Early Retirement Withdrawal Taxes to End Housing Crisis

Washington Examiner op-ed, Waiving Early Retirement Withdrawal Taxes Could End Housing Crisis, by Hugh Hewitt (Chapman):

Republicans know that the economy needs help, but that tax cuts are a non-starter with the president and that more deficit spending is equally off the table. There is one source of stimulus that the GOP should propose to the public that could not only juice current economic activity but also bring the housing crisis to a quick and merciful end.

If Congress were to allow Americans to use their retirement savings to pay-down or pay-off home mortgage debt without triggering withdrawal taxes or penalties on the use of those savings, millions of Americans would almost certainly do so, as it would free up money families presently spend on first and second mortgage payments while adding simultaneously to the retirement security of those families by securing from any future financial crisis the home in which they intend to live out their lives.

Retirement "accumulations" in the U.S. total somewhere north of $15 trillion, of which around $7 trillion exists in employee-sponsored plans, including 401(k) and individual retirement account plans where assets accumulate tax free, and where taxes are imposed upon withdrawal.

We should all know the mantra: "Taxes and penalties apply upon early withdrawal," which means that Uncle Sam swoops in for 10% off the top for money withdrawn before age 59-and-a-half and the rest is taxed at the ordinary income level. But Congress could waive those penalties and the tax depending on the use to which the funds are put, and could oblige states as well to not tax early withdrawals made for the purpose of paying off mortgage debt.

Americans taking advantage of such an opportunity would find that the hundreds or thousands of dollars spent each month on paying the mortgage would be free for other productive uses (including saving and investment) and overnight the sagging housing market would firm as thousands of houses headed for foreclosure would make a U-turn back into a family's future.

Some in Congress want to end the mortgage interest deduction -- a truly terrible idea. But if these tax-raisersdo end the most important deduction to the middle class,that rescission ought at least to be coupled with the right to use your own money to erase the mortgage that the government had through the tax code enticed the buyer to secure.

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Oh boy, what a bad idea. If you are really in a tight spot then you should let the house go and keep your retirement which is protected from creditors. And if you are not in a tight spot, then it would just be a windfall if you happen to have mortgage debt and a healthy retirement account. Not to mention it being contrary to the goals of retirement saving and actually funding 60% of our government.

Posted by: Matt | May 9, 2011 6:46:03 AM

What Matt said. This is just another proposal to bail out the banks and re-inflate the housing bubble. And Hugh Hewitt is an ideologue on the same level as the Wall Street Journal editorial board.

Posted by: Mithras | May 9, 2011 7:33:41 AM

Matt, wouldn't it be better to let individuals decide what is best in their specific situations rather than have the government tell everyone what they should do and punish homeowners trying to save their homes and lives? One size doesn't fit all.

Posted by: Woody | May 9, 2011 7:34:21 AM

No matter what you do the ravenous Big Government Beast will eat you alive.

Posted by: Susan | May 9, 2011 9:12:02 AM

First we had the sales tax holidays, then we had a "repatriation" holiday and now someone is proposing a 401k holiday? What a swell idea...

Posted by: ry | May 9, 2011 11:41:53 AM

Ya, what Matt said.

With all of the great minds in this country we could fix Goldman, Sachs and AIG but not the housing market (?).

It is more RWG* politics.

(*Rich White Guys)

Posted by: save_the_rustbelt | May 9, 2011 12:34:56 PM

The original housing price bubble still has not fully popped. Here's a graph showing the Case-Shiller index. We have a long way to go before things bottom out. We should not be using tax policy to encourage people to throw more money into a black hole. Unless, of course, you're interested in conning the middle class out of more of their retirement savings and giving it to the wealthy.

Posted by: Mithras | May 9, 2011 6:03:47 PM