Congress has been considering providing relief to Americans who have become increasingly worried about their financial security. Among the options, some have proposed reducing or eliminating the penalties on certain transactions in tax-advantaged retirement accounts. The accounts include Individual Retirement Accounts (IRAs) and qualified defined contribution (DC) plans such as 401(k) plans, 403(b) plans, and 457(b) plans. Two proposals have been suggested: (1) suspending the penalty tax for withdrawals from IRAs and DC plans that applies to individuals under the age of 59½; and (2) suspending the penalty tax for not taking Required Minimum Distributions (RMDs) from these plans, which would primarily affect individuals aged 70½ and older. Although the proposals may temporarily ease individuals' financial concerns, there are potential drawbacks to be considered. Suspending the penalties might alter the participant's behavior away from the congressional intent that these plans provide for financial security in retirement and not be used for either pre-retirement expenses or as tax-free asset transfers to heirs. Suspending the penalty for early withdrawals would potentially leave individuals fewer assets in retirement from which to draw income. Suspending the penalty for failure to take required distributions would provide an incentive to use retirement accounts as permanent tax shelters or for intergenerational bequests. One of the proposals has been enacted into law. In December 2008, the House and Senate passed H.R. 7327 , which suspends the RMD requirement for calendar year 2009. On December 23, 2008, President George W. Bush signed this bill into law ( P.L. 110-458 ). Workers benefit from tax-advantaged accounts because they are funded with pre-tax income. The U.S. Treasury estimates that the amount of the tax deduction in FY2012 to FY2016 received by 401(k) plan participants will be $356.2 billion and by IRA holders will be $80.5 billion. Because the accounts are funded with pre-tax income, the accounts then have a larger base from which to accumulate investment returns compared to non-tax advantaged accounts. An additional advantage is that the funds accumulate tax-free earnings. Income tax is paid on the contributions and accrued investment earnings when they are withdrawn. To ensure that the accounts provide income during retirement, individuals with these accounts face penalty taxes for using the accounts for most expenses prior to the age of 59½ or for failing to take required distributions after the age of 70½. As the worsening economy increases Americans' economic insecurity, individuals may view their retirement accounts as a source of funds to help meet current expenses. Current law discourages the use of funds for pre-retirement expenses by imposing a penalty for some early withdrawals. A plan that allows access to retirement account funds to current employees prior to the age of 59½ must do so through either hardship withdrawals or loans. Employers are not required to allow employees access to their DC retirement accounts before the age of 59½ or prior to separation from employment, but may provide for the option of making withdrawals or borrowing from the plan. The conditions for making withdrawals or taking a loan must be included in the Summary Plan Description. Table 1 indicates that 80.1% of households with a DC plan are able to make withdrawals and 69.8% of households with a DC plan can take loans. Table 1 also indicates that most households in which the head of the household is younger than 60 years old have access to their retirement accounts either through the ability to make withdrawals or the ability to borrow. Only 15.1% of households can neither borrow nor make withdrawals. Funds that are withdrawn from either traditional IRAs or DC plans must be included in that year's gross income. To discourage the use of retirement savings for expenses incurred prior to retirement an additional 10% tax must be paid on the amount that is included in gross income, unless the amount is rolled over into another qualified plan or IRA. The 10% early withdrawal penalty does not apply to distributions if they are taken after the individual has reached the age of 59½ ; if the individual is a beneficiary of a deceased IRA owner; if the individual is disabled; in substantially equal payments over the account holder's life expectancy; after separation from employment after the age of 55; for unreimbursed medical expenses in excess of 7.5% of adjusted gross income (from IRAs only); for medical insurance premiums in the case of unemployment; for higher education expenses (from IRAs only); to build, buy, or rebuild a first home up to a $10,000 withdrawal limit (from IRAs only); or if the individual is a reservist called to active duty after September 11, 2001. In order for DC plans to offer hardship withdrawals, IRS regulations must be followed. Specifically, distributions prior to the age of 59½ from a DC plan to an individual employed by the company sponsoring the plan must be on account of hardship, which is defined as an immediate and heavy financial need of the employee. The following expenses are deemed to be on account of immediate and heavy financial need: certain medical expenses, costs related to the purchase of a principal residence, tuition and educational expenses, payments to prevent eviction or foreclosure on a mortgage, burial/funeral expenses, or expenses to repair a principal residence. Individuals must pay income tax on the amount of the hardship withdrawal distribution and, unless the distribution is for one of the exceptions listed in 26 U.S.C. § 72(t), individuals taking hardship withdrawals must also pay the 10% penalty tax. Regulations require that an individual who takes a hardship withdrawal is not permitted to make contributions to the plan for six months following the withdrawal. As a consequence, the account would not receive the employer match. Automatic employer contributions which are not part of a matching contribution could still be made. Unlike funds in DC plans, funds in IRAs may be withdrawn for any reason, although the amount of the withdrawal must be included in gross income and is subject to the 10% early withdrawal penalty unless one of the exceptions in 26 U.S.C. § 72(t) applies. Relatively few households make hardship withdrawals from their retirement plans, although early distributions from retirement accounts may be increasing as a result of the worsening economy. For example, the Vanguard Center for Retirement Research noted that fewer than 2 per 1,000 participants took a hardship withdrawal from their Vanguard 401(k) plan in 2010. It is uncertain to what extent individuals have been increasing early withdrawals from IRAs, which might be preferred to hardship withdrawals from DC plans because individuals do not have to prove hardship to make withdrawals from their IRAs. To help households that are in financial distress, some suggest that Congress temporarily waive the early withdrawal penalty of 10% to allow easier access to retirement funds. Although the proposal would help households in financial difficulty, it would run counter to Congress' stated intention that these accounts be used to encourage retirement savings. In addition, the account balances would be irrevocably harmed because (1) the individual does not have to repay the withdrawn funds to the account, and (2) the individual would lose at least six months of contributions and any employer match. As indicated in Table 1 , households often have the choice between making a hardship withdrawal or borrowing from the DC plan. Borrowing has several advantages: Compared with other kinds of loans, the application process is generally uncomplicated and involves little paperwork. In addition, credit checks and proof of financial hardship are not required; The loan usually has an interest rate of one or two percentage points above the prime lending rate. This is most likely cheaper than other sources of credit available to households; The interest payments are credited to the borrower's account, rather than to the lending institution. This reduces the cost of the loan to the difference between the loan interest rate and the return on the plan's assets; and Borrowers can continue contributing to their accounts while making the loan payment, which prevents a large break in contributions from occurring. Table 2 indicates that 14.6% of households that could borrow from their retirement plan in 2007 had an outstanding loan. Among households with incomes of $50,000 or less, 19.5% had an outstanding loan. Among households with incomes from $50,001 to $75,000, 20.1% had a loan. Households that make more than $75,000 are more likely to have a loan outstanding than households that make less than $75,000. Suspending the penalty for early withdrawals from retirement plans might help people in financial need. Some temporary relief might be justified, particularly with the economy in recession. Individuals might have difficulty making ends meet and might not have ready access to funds to pay for ordinary expenses. In addition, suspending the penalty might encourage participation among households that are eligible but who do not currently participate in a DC plan or have an IRA. Some individuals, particularly those with lower incomes, might decline to participate out of concern of limited or costly access to the funds in their retirement accounts if they have emergency expenses. Plans that allow access to their funds may have higher participation or contribution rates than plans that do not. However, the drawbacks of allowing access to retirement savings prior to retirement need to be considered. First, funds that individuals take from their retirement accounts to pay for current expenditures will not be available when the individuals retire; this is a concern because most households rely on a combination of Social Security and withdrawals from their DC plans or IRAs as income sources in retirement. Second, suspending the penalty on withdrawals would not help individuals who are not permitted access to their retirement accounts. Finally, Congress has from time to time added to the exceptions to the early withdrawal penalty. Each exception increasingly makes the plans appear to be tax-deferred savings accounts, rather than the tax-deferred retirement accounts—the original intention for the tax code changes establishing these accounts.