Experts Warn Against Following Tim Walz's Retirement Savings Move, Call It A 'Mistake'

The whirlwind series of events that brought Tim Walz into the limelight of national politics has painted him and his personality with many great brushstrokes. One disclosure, however, makes him all at once a potential learning opportunity and a bit of an average Joe. Walz has spent a lifetime in public service, including 24 years in the Army National Guard and 10 years as a social studies teacher and football coach at Mankato West High School.

While these career choices don't add up to a gigantic nest egg, Tim Walz's pensions, built through each phase of his life in public service, add up to roughly the equivalent of a $1 million annuity's retirement income-generating potential. This reality, one of middling salary figures stretched over a lengthy career (before entering politics and becoming the 41st governor of Minnesota), adds up to relatively modest retirement savings figures for the Walzes.

On that note, although Tim Walz has been fortunate in other financial aspects, his retirement plan recently has become the subject of a different kind of interest than most would hope for. In 2023, Walz reported a $135,000 withdrawal from his retirement account in order to pay for his daughter's college education, a move that financial experts like The Moneyist's Quentin Fottrell consider "a mistake." While for Walz personally, the financial move might not drastically change his financial picture, it's one that most savers will want to steer clear of whenever possible in their own lives; here's why.

The first thing that anyone considering an early withdrawal must know is that you'll pay a 10% premium on any retirement account withdrawals you make before you turn 59 ½. In something like a Roth IRA, capital gains considerations aren't really a factor since you've already paid the tax on the money sitting in your account. With a qualified distribution (i.e., made after age 59 ½) , the IRS treats the money as if it were in a savings account — and completely yours, no matter how much growth you've experienced.

A non-qualified distribution, however (one that comes before you hit this age threshold), may be classed as taxable on top of the 10% hit. Tim Walz is 60 years old, so his withdrawal won't come along with any additional penalties, although if the funds weren't in a pre-taxed investment account, he would be on the hook for any capital gains taxes assessed on the sale and the distribution of the money (a burden that could be substantial given the size of the withdrawal). It's perhaps even likely that he waited until just after he passed the early-withdrawal age to take the money out since the action came last year, noticeably reducing his liability in the process.

There are a few caveats that can change the picture on taxes and penalties. Specifically, hardship experiences act as exceptions, including to fund recovery after a domestic abuse incident, the birth or adoption of a child (up to $5,000), to buy a home for the first time (a $10,000 distribution), or to pay for higher education expenses (with IRA plans but not a 401(k)). The full list can be found in the IRS's guidance on the subject.

For a parent wishing to set their child up for success without going into debt, a few approaches are available that don't involve gutting your retirement account(s). Firstly, aggressive planners will likely start a 529 plan for their child well before they graduate high school. This is a tax-advantaged college education savings strategy that makes funding a degree program easier. Alternatively, if you hadn't set money aside, taking out student loans with the intention of paying them back with funds from your retirement account down the road might be a fine choice.

Rather than withdrawing your cash today to pay for college expenses in the moment, waiting until payments begin to eliminate the debt will give you four more years (at least) to accrue more wealth through gains from compound interest (a simple savings rule that can propel your net worth). This is perhaps exactly what Tim Walz was thinking when he cashed in a portion of his retirement account, considering that his daughter is 23 years old, not 18. Even so, utilizing retirement funding to strike a debt isn't necessarily the best course of financial action (in Walz's case, for example, he won't reach full retirement age for the better part of a decade [i.e., 67, as he was born in 1964]).

Yet, the most important factor to consider when approaching any early distribution isn't the penalty, or other potential tax implications. Instead, you will need to be most mindful of the fact that once it's withdrawn from your retirement accounts, this money will stop accumulating additional wealth that would otherwise be used to finance your future. The interest rate on expenses you might be hoping to eliminate is certainly a factor, but it'll generally pale in comparison to the value you'll lose in future growth.

At a 4% distribution figure, Tim Walz has lost $5,400 in annual retirement income by withdrawing these funds ($135,000) from his account — without any credence given to the likely doubling event that would take place between the present and a future retirement date. Put another way, that's nearly $500 the Walzes won't have each month at their disposal if they adhere to the fiscally prudent 4% rule. At a 6% distribution figure (also advised by experts), this becomes almost $700 each month.

This said, there are certain times when a withdrawal like this may be unavoidable. For example, as reported by MarketWatch, 39% of hardship withdrawals in 2023 were made in an effort to avoid either a home foreclosure or an eviction, with 50% of Americans reporting that they have taken an early distribution for this reason or others.

Tim Walz can now count himself among this sizable cadre of consumers as well, with him utilizing his retirement assets to pay for an expense in the present. Walz's example, though, should stand apart from the typical distributor. As noted, the Minnesota governor has spent nearly his entire adult life accumulating public service time that grants pension funding, and he's in a highly competitive race to become the next vice president of the United States, a job that will pay him $235,100 per year and will certainly create additional avenues for future public-speaking events, publication opportunities, and more.

The typical American weighing whether or not a retirement distribution is a viable choice doesn't have the same future windfall potential at their disposal (although neither did Walz when he made the choice last year, to be fair). Given an extreme hardship, and the right mitigating circumstances (i.e., a quirk in your life that creates an exemption to penalties), this can be an option that staves off some kind of personal disaster. However, the decision to withdraw from any of your retirement accounts isn't one that should be undertaken lightly.