Tax- Free Distributions from IRAs & 401ks should be Allowed so Homeowners can Reduce or Eliminate Mortgage Debt on Their Primary Residence

I keep hearing from the candidates that it's the middle class that is the economic life blood of this country. So isn't it about time the government started asking the professionals who deal with small businesses , the professionals that understand the impact any new tax laws will have on the middle class -What would really make a difference to this economy-
CPAs like myself understand what has to be done-We are the ones who deal with businesses everyday and understand what is needed.

The 750 Billion Dollar Bailout does nothing to immediately help homeowners make their mortgage payments. It also does nothing to create discretionary spending- which is what this country will need to stimulate the economy again and get it out of a recession. YES- we are in a recession and you don't need a 900 point drop in the Dow Jones to comfirm that. Just look around at empty storefronts in your town. If individuals are burdened with debt payments, they can't go out and spend. If they can't go out and spend- businesses close their doors.

Do you really believe that when the Federal government gives the banking system additional capital that the banks are going to automatically start loaning out money to businesses or make it easier for individuals to buy a home? Not a chance. This may save us from a catastrophic depression but it will not ease up credit overnight on Main Street. It will take years for the pendulum to swing again in the direction where banks will be giving small businesses credit lines based upon the credit worthiness of the individual owners of the business.

The Bush Economic stimulus check was a total waste of money and a really dumb idea- TWICE dumb. It was like a pimple on an elephant's butt. What individuals need to do is eliminate debt with dollars they don't need now. With dollars they technically don't even have access to now.

MY PROPOSAL IS: ELIMINATE THE TAX TEMPORARILY ON TRUSTEE TO TRUSTEE DISTRIBUTIONS FROM IRAS, 401ks AND OTHER QUALIFIED PLANS WHEN THE MONEY IS USED TO REDUCE OR ELIMINATE DEBT ON PRIMARY RESIDENCES THAT WAS IN PLACE AS OF DECEMBER 31, 2007.

Yes- not just eliminate the penalty for early distribution, eliminate the entire tax consequence. The theory is that many 401ks and IRAs are down in value as much as 40% anyway. If you could go back in time a year ago, you could of taken out your IRA, paid a 10% penalty if you were under 59 1/2 and pay the tax and use the remainder to pay down your debt. That penalty and tax burden could have been more than 50% in some states. So by allowing individuals to reduce their debt tax free- it 's like the government gave them back all the money they lost in the market over this last year.

Most important is that by reducing the debt of these homeowners- banks will be in better shape (loans will be reduced in proportion to restated real estate values) and homeowners as consumers will have discretionary dollars available again since their debt burden has been reduced or eliminated. Improved cash flow now equates to discretionary dollars.

Some would argue that we are stealing the future of America's retirement. Nonsense - this is a totally elective gift. Essentially- the government is partnering with individuals to reduce their debt. Right now- with the market down as much as it is - most baby boomers won't be able to retire anyway.

Others will argue that this will put additional pressure on the equity markets. This may be true for a very brief period- but when stocks get low enough- buyers and new money will come out of the woodwork and snatch up the bargains.

In Summary- The government and the consumer have both been living on a deficit budget. This needs to change. The middle class is sitting on a hidden asset that if they could tap into - would allow them to reduce or in fact eliminate debt in many cases. Because credit markets will remain tight for many years to come , individuals must learn to live within their budget constraints. Tax-free distributions from retirement plans could be the shot in the arm this economy needs to jump start this economy again under these new economic rules.

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