Why is it that some of our laws tend to punish those who deserve it the least?
Our tax laws relating to retirement account withdrawals seem to be particularly out of step in this current financial crisis. Let's face it, this unemployment crisis and this recession is not showing any signs of letting up any time soon.
Hard working people who have, as a source of last resort, withdrawn money "early" (before the arbitrary age set many years ago of 59 and 1/2) are slapped with a 10% penalty for "early withdrawal" except in limited situations (which do not include, sadly, putting food on the family's table, or paying payments on the mortgage on the family home).
Ironically, if you have never owned a home before, you can withdraw the money from your 401k or IRA to buy a new home--but heaven forbid if you already own a home and a financial crisis has created a need for you to tap into your retirement savings to prevent becoming homeless before you reach 59 and 1/2.
Talk about bad policy.
While the 10% early withdrawal penalty has been put in place to "encourage" younger people to save for their retirement, there is also an under-publicized additional punitive penalty that often is imposed in addition to the 10% early withdrawal penalty.
Under IRS rules, the desperate act of tapping into your retirement account results in additional income being received in the year of withdrawal, and usually triggers an under-withholding penalty for the desperate taxpayers who can least afford to pay any penalties. Withholding rules are based upon how much money you withheld in the previous year. These arcane rules don't contemplate a desperate taxpayer who, as a result of having to tap into her retirement savings in a pinch, gets slammed with additional penalties and interest on top of the 10% early withdrawal penalty--and which couldn't be avoided by making estimated tax payments.
You see, emergency withdrawals from a retirement account aren't planned, and it's hard to make estimated tax payments to withhold enough money in advance of taking that emergency withdrawal.
Shouldn't the 10% early withdrawal penalty be enough pnishment to someone who is resorting to their savings of last resort to make ends meet? Why should there be additional penalties and interest levied on top of that?
Why, again, is the middle class being punished when others who have thumbed their noses at our tax laws for years are granted amnesty?
It is estimated that there are more than 19,000 customers of UBS who had illegal Swiss Bank Accounts and for years paid no tax on the earnings in those accounts and lied on their tax returns about the existence of those accounts by not checking that box on every Form 1040 that asks if you have any foreign bank accounts.
Yet, the IRS is willing to give these high net worth taxpayers amnesty from criminal prosecution and is not assessing penalties and interest against them.
When you compare those two scenarios, one can't help but ask: What's wrong with our values and our tax laws?
On the one hand, we have some taxpayers who did everything right. They worked hard, saved for their retirement, but watched hopelessly as their retirement savings were reduced in half by an unregulated financial system gone wild. Simultaneously, they also experienced an unprecedented tightening of credit such that banks literally stopped making loans (even though the banks were bailed out by the federal government).
So what is someone in that position supposed to do if they lose their job, or have an illness in the family, and want to keep a roof over their head, or make a car payment, or put food on the table for their children?
It is not surprising that millions of middle class Americans have had to choose the expensive option of incurring a 10% penalty for withdrawing money from their retirement account because they had no other option available to them.
It is time for Congress and the IRS to stop rewarding the tax cheaters, and stop punishing law-abiding taxpayers.
Steps need to be taken immediately to allow some penalty free withdrawals from retirement savings accounts and to grant amnesty for all penalties and interest incurred during the past 3 years, retroactively.
It's time for middle class taxpayer relief, for the folks who play by the rules--For A Change.
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