IRS’ 401k Early Withdrawal Penalties vs. Americans in Reality

I have been seeing a number of media reports about a HelloWallet analysis related to individuals withdrawing funds early from 401k and defined contribution pension plans.  The theme in this reporting is that these programs have failed as vehicles for retirement savings, because withdrawals are being used to pay living expenses.  There are a few relevant points to consider in this reporting.

First, there is currently a drive by some legislators to eliminate individual tax reductions for retirement savings as a way to increase tax revenue.

Second, the alternative for retirement savings championed by these legislators is collectivist defined benefit pensions, which are currently grossly underfunded because of investment losses, prospects for lower investment returns in the future, and the failure to collect initial contributions equal to promised benefits.

Third, our current level of high taxes and tax avoidance schemes nudge individuals into politically favored savings (retirement, health care, and education) to the detriment of general purpose savings required to sustain normal living.  In doing so, our legislators have increased financial risk for individuals.

What are the relevant principles that should be applied to the issue?

  1. Individuals should be in control of, without nudging by government, their own savings as it is their property; and
  2. Proper taxes are exclusively for the purpose of raising revenue to pay for legitimate government functions (police, military, courts).

To encourage individual savings, the Congress needs to eliminate the tax “incentive” schemes that it has previously created and instead lower the tax rate.  Although not discussed, there is another issue that must be mentioned; Congress must eliminate regulations that are lowering productivity (income) and increasing expenses.

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3 Responses to IRS’ 401k Early Withdrawal Penalties vs. Americans in Reality

  1. Pingback: Top 10 Books for Selfish Citizens, 1st Quarter 2013 | Selfish Citizenship

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