Today, Sen. John McCain (R-AZ) gave a speech in Pennsylvania outlining his new economic proposal – The Pension and Family Security Plan. One of the new provisions included in the plan is temporarily lowering taxes on withdrawals from IRA’s and 401(k)s:
John McCain Proposes That Withdrawals From Tax-Preferred Accounts – IRAs And 401(k)s – Should Be Taxed At The Lowest Rate – 10 Percent – In 2008 And 2009. This policy will apply to the first $50,000 withdrawn from these accounts each year and will affect the accounts of nearly nine million Americans over the age of 60, permitting them to devote more of their income to retirement needs.
During the speech, McCain touted this new provision, while saying that “it is essential we avoid an exodus of capital from the market.” Watch it:
McCain also criticized Sen. Barack Obama (D-IL) for “encouraging early withdrawal of funds from 401(k) accounts, by suspending penalties through 2009.” McCain said that “this is an invitation to capital flight, and therefore to continued instability in the market, at a moment when exactly the opposite is needed.”
However, if McCain is aiming to prevent an exodus of capital, then he is taking the exact wrong approach.
Investment strategists agree that seniors should use “the most tax-efficient withdrawal sequence to fund retirement.” By temporarily lowering the rate on withdrawals, McCain is enticing wealthy retirees to withdraw money from their retirement accounts before the higher rate kicks back in after 2009.
While this provision may help some families who desperately need money now, it encourages those with the most money in their accounts to reap a massive windfall profit by withdrawing their money under a lower tax rate than they would be subject to otherwise.
McCain’s proposal amounts to a huge “invitation to capital flight.” Like most of his economic proposals, this newest offering from McCain is simply a tax cut for the wealthiest Americans.
UPDATE: MSNBC’s John Harwood understands the implications of McCain’s plan, and asks McCain economic adviser Douglas Holtz-Eakin if people would take money out of their accounts “solely to take advantage of that lower tax rate.” Watch it: