Originally Posted by neetanddave
Well, I meant banks, financial institutions, whoever has the 401k monies. They use that money (whether real or on paper) to make loans, etc. If everyone withdrew their monies, there could be a rush on cash, or there'd be nothing for them to loan (on paper.)
It isn't correct that they can use that money to make loans. Accounting in banks is counter-intuitive. Deposits or investment accounts by individuals are liabilities to a bank on its balance sheet. Securities accounts (IRAs or 401(k) accounts) are simply income-producing vehicles for them. Cash accounts and deposits, on the other hand, they can loan against, and typical managed accounts carry just 3% - 5% "cash" (money market accounts or whatever).
The current mandatory withdrawals applies to IRAs, and at 72 1/2, it is mandatory that some specific amount is withdrawn every year (depending on amount in/value of IRA). So removing the mandatory withdrawal requirement doesn't prevent a run on cash or the accounts - right now people are required to take it out. It would allow people to choose whether or not they withdraw the money once they reach 72 1/2 instead of forcing them to take it out. So for instance, if a retired person has a comfortable income from some other source - a job, some other portfolio that provides them with enough dividend income to live off of, whatever, if they're forced to make a withdrawal from their IRA, that could potentially push them into a higher tax bracket than they would be otherwise (I think). So by having the choice not to manditorily withdraw money each year, they can "push out" the tax bill that would otherwise come due.
It also means that people who are 72+ and have another source of income aren't going to be forced to withdraw money from accounts that may be down 30% - 40% from their valuations last year - which, right now are just paper losses - but if forced to sell, would become realized losses.