Investor Alert

Help Me Retire

May 8, 2021, 12:18 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

MarketWatch photo illustration/iStockphoto

Dear MarketWatch,

I’ve been contemplating taking the penalty-free COVID withdrawal from my Thrift Savings Plan retirement account. My wife and I earn roughly $180,000 a year combined and have about $190,000 in our retirement plans — $110,000 in my plan and $79,000 in her 403(b). We each contribute 15% and get our respective employer matches at 5%. We are both in our mid-40s.

My wife, who works in health care, is working 32 hours a week instead of 36. While it doesn’t seem like a ton, at $40/hour, it adds up every month.

We have one auto loan where we owe $12,000 at 2.1% APR with two years left, and another car with an auto loan where we owe $13,000 at 1.9% APR. We also owe $17,000 on credit cards at a 0% interest rate until the summer of 2021, which were used for home renovations (since completed). We owe $298,000 on our house. We also have a repayment plan in place for our federal student loans, which are on COVID holiday until October and our payments are around $1,400 a month. We each have three years left to pay them off. We also have two children, 11 and 9, but zero socked away for their college.

Need some help with your own retirement planning? Email us at HelpMeRetire@marketwatch.com

My question is this: provided I qualify to make the COVID-related withdrawal, would it be foolish to withdraw $40,000 from my Thrift Savings Plan (not as a loan but as a withdrawal) and spread the income tax out over three years to be debt free (aside from my house and student loans)? We are very disciplined with paying bills and contributing to retirement. We’ve always paid credit card balances in full every month (aside from the bills we racked up from the renovation). Thankfully, I have superb credit. We will drive these cars until they die and the house is where we want it so we plan to stay forever.

I want to do this because I worry about time — time left to invest in other things, to escape the rat race and have financial freedom. I figure if we just keep making the payments it will take me at least 2-3 years to pay all of this stuff off. I will be close to 50 then and my kids will be closer to college. Otherwise, I can take the $40,000 out in one shot and start again fresh so we have some more capital to invest.


The public servant family

See: I want to retire to a rural location with four seasons that gets me out of New York state — so where should I go?

Dear Public Servant Family,

As you know, the CARES Act increased the amount of money Americans can withdraw from their retirement plans if they were financially impacted by the crisis, such as falling ill, losing a job or seeing a reduction in wages. The Internal Revenue Service even expanded the eligibility requirements last week to include people who had a job offer rescinded, a delayed start date or are in the same household as another person affected by the crisis.

There are no minimum amounts of money lost or hours reduced to qualify, so you are technically able to withdraw money from your plans if you wanted because of her reduction in hours (and the fact that it affects you). Here’s more from the IRS on the rules and eligibility requirements , as well as information from the government’s Thrift Savings Plan site .

The law eliminated the penalty fee for these distributions, which makes it a tempting offer for people who want to dip into their retirement savings but previously couldn’t do so without incurring extra fees. Financial advisers, however, suggest you don’t quickly jump on this opportunity.

Here’s why: Distributions or loans from retirement plans should be considered as a last resort, because when you take money out of these accounts you are stunting the potential growth of those assets for your future. With a lower balance, compound interest won’t accumulate as quickly. Situations can also become complicated. A loan has to be repaid, but that timeline could be rushed if the borrower loses their job, and a distribution — as you asked about — still incurs tax penalties, which can become a hefty bill.

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