"Rollover" Your IRA Into Your House -- Tax Free!
An Alternative Stimulus Idea
BY KEN SCOTT
High Point, N.C. -- Some say that government spending on a massive scale is the best answer to the economic crisis. Others believe that immediate tax cuts are the solution. I propose a better option -- something that would require neither immediate government spending nor tax cuts, but which could still have a substantial "stimulative" impact. Here is the proposal: Make a change to the retirement account withdrawal exception list so that homeowners can use retirement fund assets (401K, IRA, etc.) to "pay-off" primary home mortgage debt without tax penalties or consequences.
Under my scenario, homeowners would have immediate monthly cash (their previous monthly payment) available to reinvest at now favorably low rates. They would spend into the consumer economy, pay down other debt, and/or increase savings. Regardless of how the funds are used, their mere availability would likely increase the economic confidence factor, an important consideration in any economic recovery. This "payoff" of mortgages would inject substantial cash into the mortgage and housing lenders. That's right where it needs to be given that's where the economic crisis began and where "loanable" assets are needed.
The impact of this measure on government tax revenues would be spread out and diffuse because tax revenues from these retirement assets aren't expected for several years (usually until the homeowners reach retirement). And, in fact, the reduced interest deductions in early years will add money to the government tax coffers. I'd suspect that many of those who would take advantage of this option would already have used the majority of their interest deduction as their home loans are toward the end of their life.
My proposal would allow homeowners to convert from riskier assets (such as the stock market and related investments) into a more stable asset -- their own home. It took around 25 years for the U.S. stock market to return to 1929 pre-crash levels. If past is prologue, anything remotely similar following today's situation would reinforce the wisdom of pursuing other uses for that capital.
As homeowners exercised this newly available option, there would be short-term negative downward pressure on stock prices. This would be offset by the greater positive impacts of the stimulus package and the positive impact of consumer purchases made possible by new cash flow available to homeowners.
The fact that this measure can substantially stimulate the economy without a large government outlay can't be emphasized enough. There is nearly $10 trillion in primary residence U.S. mortgage debt. One hundred billion dollars (about 10 percent of the current "stimulus" package) would enter the U.S. economy if only one percent of the U.S. mortgage debt could be retired.
This measure is likely to benefit those homeowners who have done things right (i.e. made their payments steadily, didn't buy beyond their means, etc.). It will, however, help many homeowners who would likely not receive any direct stimulus benefit otherwise. Although it's true that homeowners would give up the long term upside of their investment holdings used in this way, a portion of this loss would be offset by the interest payments they would no longer be required to make.
The success of this measure in part relies on it not being misused. It does no one any good if homeowners deplete retirement accounts and do nothing to rebuild them. For those who prefer to have their decisions made by elected officials, this level of risk tied to personal responsibility unfortunately makes them nervous.
To alleviate legitimate concerns, certain administrative constraints could be placed on this measure. Among these could be its application on a year-by-year basis. That is, a homeowner could pay the next 12 months of primary home payments using retirement accounts assets without penalty. This would minimize impact on retirement account balances while providing "stimulative" effects. An alternative control might be to place a limit or guideline on the percentage of the retirement funds that could be used. While perhaps difficult to implement, this limitation would minimize gross depletion of retirement accounts and would at least allow home refinancing based on a substantially lower remaining balance. It would, of course, be paramount for homeowners considering this option to seek out sound and prudent guidance as to whether their personal financial situation would benefit from leveraging this policy.
The implementation of this measure would benefit our current economic situation and could be put in place quickly, with little administrative or bureaucratic overhead. In stark contrast to most solutions now on the table, where the government is making the decision and the bureaucracy will implement it, this idea could be triggered by and through a series of personal decisions.