Withdrawing from IRA to avoid potential for federal seizure?

[brian0918]

I have read repeated claims that as the government becomes more and more broke, they might tap into the trillions of dollars in retirement accounts to keep the money flowing, under the guise of offering a mandatory retirement account (Joe Biden called it a "Guaranteed Retirement Account"). This would probably just become an unsustainable Ponzi scheme like Social Security.

Granted, this could just be a scare tactic by the Republicans, but is there any precedent of retirement seizure occurring? I guess with FDR's seizure of gold from bank safe deposit boxes, anything is possible.

Could it be a good idea to withdraw early from an IRA program, take the 10% penalty and income tax hit, and keep the money in a safe, or better yet convert it to a non-fiat commodity?

(Obviously this depends on how close to retirement you are.)

Edited June 6, 2010 by brian0918

[brian0918]

I guess there is a precedent: Argentina did this a couple years ago. The House Democrat in favor of such an action says it would be "similar to Social Security" - that is comforting.

Edited June 6, 2010 by brian0918

[RussK]

I'm not an economist, so these opinions are somewhat barely educated generalizations. However, wouldn't the Fed simply create money the way they have been doing, by buying securities and creating new money, if they were worried about the low supply of dollars? If the money supply goes to hell, won't it be at the behest of the Fed anyway? In which you wouldn't have to worry about your IRA being raided because they're purposely withdrawing money from circulation.

EDIT: I just realized this wasn't talking about the Federal Reserve. I saw "federal" seizure, and the Fed automatically came to mind. This post can be disregarded.

Edited June 6, 2010 by RussK

[brian0918]

Reading more about this topic - if you plan to do early withdrawal, you should do it in chunks that are small enough not to send your income into a higher tax bracket.

[DavidOdden]

There is nothing in the report that points to a plan for "the seizure of 401(k) retirement plans and the subsequent government-administered disbursement of the funds". The actual plan has problems, but it's important to not make up stuff.

[ex_banana-eater]

You could do something like this and your assets will be completely safe from government confiscation. Foreign property might be the best out of those to invest in.

[brian0918]

You could do something like this and your assets will be completely safe from government confiscation. Foreign property might be the best out of those to invest in.

That's just begging for an audit. Tax loopholes tend to close up when attempted in practice.

Edited June 6, 2010 by brian0918

[brian0918]

There is nothing in the report that points to a plan for "the seizure of 401(k) retirement plans and the subsequent government-administered disbursement of the funds". The actual plan has problems, but it's important to not make up stuff.

That's certainly true, but with the government, "options" have a way of becoming "mandates". Because I have an SEP-IRA that I can control, I may just leave it in the IRA and put it where I think is safe. If the government later decides to mandate annuitization of IRAs in order to prop up the Treasury, hopefully I will be able to withdraw it before the law is passed.

But what if they first choose to make the tax penalty much greater for early withdrawal, as a way to stop people from withdrawing once (if) forced annuitization occurs. Then I will regret not withdrawing it sooner.

[softwareNerd]

That's just begging for an audit. Tax loopholes tend to close up when attempted in practice.

Self-directed IRAs aren't really a loophole; but, neither are they safer from confiscation that any other type of 401(k) or IRA. When one changes jobs, one can withdraw the 401(k) money from the old job and move it into the 401(k) at the new job or one can move it into a "roll-over IRA". If the rollover IRA is with a brokerage firm that lets you decide where the money should be invested, then it is "self-directed". The firm is still the custodian and will not give you the money without subtracting taxes and penalties. So, if the government ever were to change the rules to take away some money from 401(k)s and IRA, then self-directed IRAs are just as vulnerable.

Short of radical developments, I cannot see the government confiscating 401(k)/IRA money outright. However, they may remove some of the "tax-shelter" aspects. Even this will probably be done in a round-about fashion that will almost certainly be means-tested. As an example, the government may ask people to add their 401(k)/IRA withdrawals into their regular income, calculate tax at the rate that applies to that (which would be a higher marginal rate), and then subtract a certain portion as a credit -- -effectively not taxing the withdrawals, but using it to push people into a higher rate for other non-IRA income. By its nature, such a scheme is also "means tested". Or, one might have a scheme that disallows some portion of one's standard deduction if one has more than a certain level of IRA income. The possibilities are endless, but one way or the other, I think it is not a stretch to think that the government will try to get a little more tax money from people who have saved more than average outside the social-security system, and use it subsidize those who have not.

I doubt there is any good legal way to circumvent such a rise in taxes, because legally one has to report all income. For instance, if one buys gold coins (bullion), then one has to pay taxes on the gain when one sells them.

[brian0918]

Self-directed IRAs aren't really a loophole

The link banana provided described an IRA in which all of the money is put toward an LLC that you are also the manager of, and so you are basically giving yourself money to buy and manage whatever you want. That's what I said was begging for an audit.

[softwareNerd]

The link banana provided described an IRA in which all of the money is put toward an LLC that you are also the manager of, and so you are basically giving yourself money to buy and manage whatever you want. That's what I said was begging for an audit.

Sorry, my mistake.

Even with that structure, if the government wants more tax to be withheld etc., one would be liable, while wearing one's "manager hat". While the structure allows one to invest in a wider range of things, but is not secure from government control.

[Trebor]

Neal Boortz was talking, again, yesterday about the possibility of the government seizing all retirement accounts:

"Retirement Security"

"For 16 years I've been telling you that if the Democrats gained enough power in Washington, they would attempt to seize the money you have in your 401K, IRA and private pension plans. Many of you poo-pooed me, calling me "over-the-top" or unable to back up my claims.

Maybe you might be interested in knowing that just last Thursday, a Senate Health, Education, Labor and Pensions Committee held a hearing on retirement savings and security. WebGuy forwarded me lots of emails of people asking me to prove it. So here you go. You can watch the committee meeting right here ... and then you can be more entertained by turning to watch the paint dry on your walls. Or you can read this summary of the meeting from Connie Hair at Human events. The point of the meeting was to figure out ways in which private 401(k) plans could be more "fairly" distributed as taxpayer-funded pensions. Senator Tom Harkin, Chairman of the Committee, hand-picked the witnesses for the meeting. Who did he chose? People advocating "Guaranteed Retirement Accounts." Sound familiar? It should. I've been telling you about this plan for at least two years. It is a plan created by Theresa Guilarducci and it would seize private retirement accounts, set up an additional 5% mandatory payroll tax, and then use the money from the tax and seizure to distribute it "fairly" to Americans."

That link (above) to Connie Hair's summary is "New Lame Duck Threat to Bailout Union Pensions" (10/08/2010)

In part, she says:

"Democrats in the Senate on Thursday held a recess hearing covering a taxpayer bailout of union pensions and a plan to seize private 401(k) plans to more "fairly" distribute taxpayer-funded pensions to everyone.

Sen. Tom Harkin (D-Iowa), Chairman of the Health, Education, Labor and Pensions (HELP) Committee heard from hand-picked witnesses advocating the infamous "Guaranteed Retirement Account" (GRA) authored by Theresa Guilarducci.

...

In a nutshell, under the GRA system government would seize private 401(k) accounts, setting up an additional 5% mandatory payroll tax to dole out a "fair" pension to everyone using that confiscated money coupled with the mandated contributions. This would, of course, be a sister government ponzi scheme working in tandem with Social Security, the primary purpose being to give big government politicians additional taxpayer funds to raid to pay for their out-of-control spending."

Edited October 12, 2010 by Trebor

[Steve D'Ippolito]

Minor quibble. He said this today (the 12th) not yesterday.

[Jake_Ellison]

It's a two hour video (most of it about nothing, but not in the funny Seinfeld way), so there's no way I can watch that from start to finish and keep my sanity. Can you post the specific minutes (at least approximately) in which Theresa Guilarducci's "GRA" plan is being discussed, during the hearing?

[edit] Never mind. I found it. (unless there is more, in which case please mention it) It's at 1:31 - ish. Ross Eisenbrey is asked "How would you help people in the low to mid income rate to save more?", and he replies that right now we don't need more savings, but generally speaking the answer is that "it's difficult to get people to save because of human nature". He then continues to say that he is actually in favor of a mandatory retirement system funded through government subsidies (doesn't mention where the money would come from), as described in the "GRA" plan. He moves right along at that point, to less radical solutions others have suggested (creating other incentives for low income earners, i.e. "tax credits"). That's the end of the segment, the other guy (the blatantly populist Sen. from Vermont) has some unrelated pointless speech he feels the need to share.

That is the extent of the discussion about this, there is no mention of nationalizing anything. (at least not in this segment, if it is discussed more elsewhere, please mention it.)

Just from that, there is no reason to worry about the plan being implemented. It was a fleeting suggestion by a guy who knew his audience had no interest in hearing about it right now. I guess it's a long term plan, for when the gods deem it necessary for us mere mortals to "be made to save again". Right now what we need is more consumption on borrowed money.

Edited October 12, 2010 by Jake_Ellison

[Trebor]

Minor quibble. He said this today (the 12th) not yesterday.

Yes, you are right, Steve; I stand corrected. I do remember him talking about it several times in the past, even yesterday, on the irregular occasions that I have listen to him, well not that particular information, but his prediction that the government would be going after retirement accounts at some time. As he said, he's been predicting such a take over for many years.

It's a two hour video (most of it about nothing, but not in the funny Seinfeld way), so there's no way I can watch that from start to finish and keep my sanity. Can you post the specific minutes (at least approximately) in which Theresa Guilarducci's "GRA" plan is being discussed, during the hearing?

I just saw your update to your post, Jake. I have no more information on it.