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Monday, September 25, 2017

K-1 Visas and 401(k) Hardships Meet in the World of 90-Day Fiancés

‎There's a counterintuitive aspect to the general and 401(k) hardship rules. Essentially, it can be pretty hard to get a hardship withdrawal. It all seems so cruel and harsh. Why should I be prohibited from getting my own money when I need it? Isn't that just another example of complex regulation giving rise to incomprehensible results for no good reason?

No - the concept of killing someone with kindness comes to mind. The idea here is that the enormous tax subsidy provided by the federal government for retirement plans is for money that's there for . . . retirement. If people are given access to retirement funds too easily, then, when it's really important for the retiree to have the funds to allow the new post-employment phase of life proceed as expected, the funds may not be there. And what could be more dangerous than an older retiree with no visable means of support?  So the greater the access, the more danger that the money won't be there for retirement, to the potential devastating impact on the retiree. That's the very retiree who, before retirement, may have been so upset that the money was not early available.

The rules are even tighter under Section 401(k). Section 401(k) runs counter to a fundamental seminal tax-code concept, in particular that, once the applicable facts are set, the taxpayer does not have control over when taxation occurs. For example, service providers are taxed not only on actual receipt of compensation but also on constructive receipt of compensation. The idea is that, if under some set of facts the time of taxation is triggered, then the individual can't just decide to change that timing. Section 401(k) stands in stark opposition to that foundational concept. So Congress (and Treasury and the IRS) provided that, here, where not only is the money there for retirement but it's there under a special provision allowing completely elective deferrals (and the control of the timing of taxation for the service provider that this control brings), the hardship rules would be even tighter.

Two high-profile considerations of this issue come to mind. The first was the odd spectacle of watching both the McCain and Obama campaigns, after the sub-prime crisis had hit, pandering away with criticisms of the IRS for not allowing expanded access to 401(k) money. How could the IRS be so cruel? This might've been like the only thing those two campaigns agreed on, and, hilariously, they were both flat-out wrong. The proof? After bipartisan support from the candidates themselves for this specatularly misguided initiative, it went absolutely nowhere after the election. I can only the imagine the meetings after the election at which senior Treasury officials said to President Obama, with Ringo-style peace and love,*something like, "President Obama, with all due respect, uh, . . . no."

Well, you think THAT was high-profile? Now, then, get ready for a high-profile Think Tank where the deepest thinkers here and abroad consider weighty matters relating to politics and economics. Yes, that's right, look no farther ‎TLC's 90-Day Fiancé: Before the 90 Days

So let's look at the story of Larry & Jenny. Larry has decided to traipse off to the Phillipines to meet and marry (!) a young girl named Jenny. We get the following, from Larry:

"I really hope Jenny likes the hotel because I spent my 401k on this trip. . . . I put everything on the line for this trip - my 401k, my heart, everything. . . . Most people find it crazy that I spent my 401k, but this could be the trip that changes my life forever."

Maybe he got all confused, being that "k" and "1" appear in both "K-1" and "401(k)"? While that's an appealing theory, it seems more like he just thought it was no biggie for him to wipe out his nest-egg ‎in favor of a trip to meet a girl that he had come upon on the Internet.

If you need convincing regarding the propriety of the 401(k) hardship rules, just keep reading Larry's series of deep-thinking statements above.  Read them over and over and over.  And over.

Maybe, just maybe, tight restrictions on access to 401(k) and other retirement savings really does make some sense. Sheesh.

* See (for what may well be one of the funniest things EVer, courtesy of Mr. Starr).

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