Question: Should I take out $40,000 from my $190,000 in retirement savings to pay off various debts? Answer: Just because you can doesn't mean you should.
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. We each contribute 15% and get our respective employer matches at 5%. We are both in our mid-40s.
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.
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.
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.
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