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Help Me Retire

July 11, 2020, 2:56 p.m. EDT

We have $190,000 in retirement savings and want to use the COVID-related distribution rules to pay off $40,000 in debt — should we?

The CARES Act allows some savers Americans to take money out of their retirement accounts — but advisers say they should proceed with caution

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By Alessandra Malito, MarketWatch

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In your particular situation, the taxes owed would be at higher rates than the current interest rates of your debt, said Salim Boutagy, a financial adviser at Congress Wealth Management. Retirement plan distributions are taxed as ordinary income. Based on the information you shared, if you’re filing married jointly, you’re somewhere around the 22% to 24% tax bracket. A $40,000 distribution would equate to a roughly $9,000 tax bill, which could be broken up over three years. “You’re trading one debt for another, essentially,” said Tom Zgainer, founder and president of sales for America’s Best 401(k), a retirement plan provider.

I know you said you have the intention to spread out and pay off those taxes, but you’d be better off creating a written budget inclusive of your current debt and assets, and focusing more heavily on saving, said Scott Bishop, a partner and executive vice president of financial planning at STA Wealth Management “I would have him look at his budget and see if there is any fat at all to get rid of some discretionary spending,” he said. “If they are doing that to have more to spend now so that they can be ‘better savers’ — the logic is flawed.” Ask yourself: “Just because I can take this money out, should I?”

There are alternatives to a distribution, said Ed Jastrem, director of financial planning at Heritage Financial. For example, lowering retirement plan contributions — just enough to still get the full employer match — would give you more money in each paycheck to pay down your debts within the next few years, just as you would if you were paying off the taxes from your distribution, he said.

If going that route, the key is to pay down the debts with the higher interest rates, which are still pretty low for you, Bishop said. You’re already doing something other advisers would suggest: using 0% interest cards.

There’s still time to make your decision. The COVID-related distribution rules are available between Jan. 1 and Dec. 31, 2020 — only after that would you lose your ability to spread out the tax liability over three years and incur a 10% penalty on the distribution. The dollar limit, which increased from $50,000 to $100,000 for COVID-related distributions and loans, is available until Sept. 22, though you said you only want to withdraw $40,000.

Still not sure? I’ll leave you with this: remember why there’s money in those retirement plans. It’s for your financial security in the future. A $40,000 distribution is more than 20% of your combined retirement assets — more than 36% of your individual Thrift Savings Plan balance alone.

“With retirement planning, you either have enough money or you don’t and it is often very hard to make it up later,” Boutagy said. College costs are a concern for many parents, but there are more options available to fund college, including choosing an affordable school, using loans responsibly, taking advantage of any tax credits available at the time and working with the kids to pay off those expenses as quickly as possible.

“As tempting as it is, and as broad of the qualifications, don’t do it,” Boutagy said. “If your back is against the wall then I would say do it, but if you’re in a situation like this where he doesn’t need it but he’d like it, I’d say no.”

Letters are edited for length and style.

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com.

Alessandra Malito is a retirement reporter based in New York. You can follow her on Twitter @malito_ali.

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