Wallis: Remove penalty on tapping IRA early

David Wallis is the editorial director of the syndication agency Featurewell.com.

Before President Barack Obama began rolling out a string of new economic initiatives to revive his flagging poll numbers, he offered a less political rationale for his proposals: "There are too many people hurting in this country for us to do nothing."

Given that goal of alleviating economic suffering, Obama should try to cure a chronic disease that afflicts many Americans: credit card debt. While the national credit card delinquency rate is historically low, the ratio of borrowers with past-due balances of more than 90 days rose in the last quarter -- the first increase in nearly two years. Meanwhile, the average American household carries a wallet-busting $15,799 in credit card debt, according to creditcards.com. And despite a prime-lending rate of just 3.25 percent, consumers pay an average interest rate of more than 13 percent on credit card debt.

Obama should try to make it easier for Americans to tap their own retirement funds to cope with urgent financial hardship.

Currently, the Internal Revenue Service charges taxpayers younger than 591/2 a 10 percent penalty for early withdrawals from individual retirement accounts. Taxpayers can avoid the penalty in some circumstances, including a permanent disability or use of the money to buy a first home. Yet plenty of desperate people who don't qualify for these narrow exceptions fork over the 10 percent penalty when they can least afford to. The IRS reports that more than 5 million taxpayers paid penalty tax on qualified retirement accounts (including IRAs) in 2006. By 2009, the most recent year for which data is available, the number shot up by roughly 14 percent.

Shelving the 10 percent penalty in some situations is not a new idea. During his 2008 presidential campaign, then-Sen. Obama's "Rescue Plan For The Middle Class" called for penalty-free hardship withdrawals from IRAs and 401(k)s for two years. "To help families . . . make it through these tough times," read the plan, "Obama [is] calling for legislation that would allow withdrawals of 15% up to $10,000 from retirement accounts without penalty."

But after Obama won the White House, the proposal vanished.

Financial planners usually warn people not to touch their IRAs before retirement. But the current perfect-storm conditions -- high unemployment, rising medical insurance premiums and plummeting housing values -- are forcing some people to rely on their rainy day funds. What's preferable? Borrowing from credit card companies or banking on yourself?

Some economists deem people with credit card debt as irresponsible and unworthy of a break. The thinking goes that if you offer debtors the chance at a clean slate, they'll soon find themselves in the same financial mess -- only the next time they won't have an IRA. "When people get burned they tend to stand further away from the fire -- for a while," says Harvard economist Jeffrey A. Miron, author of "Libertarianism, from A to Z." "Then they forget and get burned again."

Some will face that unfortunate fate. To mitigate that possibility, penalty-free withdrawals of IRAs could be capped. Perhaps $15,799 -- the average household credit card debt -- is an appropriate number. Joydeep Srivastava, a professor of consumer psychology at the University of Maryland, likes the idea of mandating a credit counseling class, too, as a requirement for a penalty waiver. "Folks who do go through the classes are likely to be more responsible -- just finishing up the course is a show of commitment. The course needs to be have some meat in it, such as a certain minimum level of time commitment, [so] that it is not easy for everyone to get through easily."

Changing the tax code requires approval from a Congress that is hellbent on denying Democrats any political victory. Still, proposing a waiver to a penalty that hurts people who are hurting would be a win-win-win situation for the president. He can force Republicans to fight or accept what amounts to a Democrat-sponsored tax cut, shame a rapacious credit card industry, and, at the same time, again show struggling Americans that he wants to nurse them back to financial health.