The IRS should waive the 10% early withdrawal penalty on the use of Traditional and Roth IRA funds for cases of chronic unemployment and under-employment until the economy reaches a recovery level (suggested here at 6% unemployment for 12 month rolling period) where saving for retirement can continue again. Ideally, this waiver should have started in 2008 or 2009 to be fair to all US citizens impacted by the financial crisis, but it should at least start with the 2011 tax filing.
US unemployment and under-employment is estimated at 15-16% of the workforce or approximately 23 million US citizens based on current Census and Bureau of Labor statistics. Since those filing for unemployment benefits is currently estimated at 3% this leaves roughly 13% or nearly 19 million individuals who while trying to meet their current expenses are going into debt, selling all possessions, finding other unconventional resources, retirement resources or with all that failing becoming homeless and falling to reliance on charity. If any of these 19 million individuals are using their retirement funds to meet expenses and are under the age of 59 1/2, they are required by the IRS to pay a penalty of 10% on early withdrawal. This penalty is an unnecessary artifact of a time when the government believed these funds could accumulate tax-free for future use and represented a possible tax loophole. Under current conditions, when the government is looking for easy ways to assist US citizens under financial stress, this is one simple fix to the tax code to assist. It is important to note that due to the financial markets sustaining multiple episodes of stock market and securities losses since 2000, many of these IRA accounts have been and are experiencing losses. Some have lost as much as 100% of their accounts. With the current volatility in the market, it is not certain that funds will be available for future retirement purposes. Withdrawing funds that remain in these accounts from the financial markets could be a better use than gambling on the current market instability.
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