Minnesota Gov. Tim Walz, potentially Kamala Harris's running mate for the 2024 presidential election, recently made headlines for withdrawing $135,000 from his 401(k). The move, aimed at covering his daughter's college expenses, has sparked a debate on whether this is a financially sound choice.
At 60 years old, Walz is nearing the typical retirement age. However, his decision to dip into his retirement savings raised questions about the potential risks involved. Walz revealed to The Wall Street Journal that he withdrew nearly 10% of his estimated $1 million in retirement savings.
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Financial Implications
There are a few consequences of this withdrawal:
Taxes: Since withdrawals from retirement accounts are taxed as income, Walz will need to report this $135,000 on his 2023 tax return.
Penalties: If Walz were under 59½ years old, he'd face a 10% early withdrawal penalty, costing him an additional $13,500. However, since he's over that threshold, he won't be subject to the penalty.
Missed Growth: Withdrawing funds from a retirement account also means losing potential compound interest, which could have a long-term impact on his savings.
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Hardship Withdrawal?
It's unclear whether this withdrawal qualifies as a hardship distribution under IRS guidelines, which would allow it to be penalty-free for certain expenses like education. Regardless, Walz would still be liable for taxes on the amount withdrawn.
Walz's Financial Situation
Walz's overall financial picture remains solid, with he and his wife, Gwen, reporting a combined income of around $300,000 in 2023. A portion of this income – about $135,000 – comes from pensions or annuities. Walz also earns $127,629 annually as governor, a salary he declined to increase in 2023. His diverse career, including teaching, service in the National Guard and politics, has given him multiple sources of retirement income, providing him with more flexibility than most Americans.
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Experts Weigh In
Financial professionals generally discourage tapping into retirement accounts early, unless absolutely necessary.
Yusuf Abugideiri, chief investment officer at Yeske Buie, told CNBC, "Taking money out of your retirement accounts to use for something else means, by definition, that money won't be available for retirement." He warns this could create a difficult financial situation down the road.
Gerika Espinosa, a certified financial planner, shared a similar concern, noting, "People are doing it at the expense of their own retirement and then their retirement suffers. And then it's kind of a lose-lose situation."
David Boniface, a financial wealth advisor, highlighted the long-term risks in Barron's, stating, "You're going to be a financial burden on your children when you're in your 80s, because you blew up your retirement."
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Alternatives
Experts often recommend other ways to cover educational expenses, including:
- Federal and private student loans
- 529 college savings plans
- Scholarships and grants
- Work-study programs
Walz's choice highlights the tough financial decisions many families face today. Ultimately, it reminds us of the importance of balancing short-term needs with long-term financial security. While you can get a loan for college, remember you can't get a loan for your retirement.
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