Rand Paul bill would allow withdrawals from retirement accounts to pay down student loans

Rand Paul bill would allow withdrawals from retirement accounts to pay down student loans
Experts question the wisdom of tapping retirement funds for other purposes.
DEC 05, 2019
Money accumulating in retirement accounts is increasingly being targeted by lawmakers to help people pay for other expenses, a trend that worries experts who say the funds should be left alone to address the looming challenge of retirement security. Sen. Rand Paul, R-Ky., introduced legislation earlier this week — the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act — that would allow people to withdraw up to $5,250 annually from a 401(k) or individual retirement account without incurring taxes or penalties to pay back student loans or finance college. The funds also could be used to pay tuition for a spouse or dependent. Another provision of the bill would let workers take employer contributions to their retirement plans as Roth contributions, or after-tax money, instead of taking the typical tax-deferred payments into the plans. Workers would then be able to withdraw the money after retirement tax-free. A fact sheet about the bill argues that withdrawing money from a retirement account to pay student loans would put more money in people's pockets than investing the same amount in U.S. bonds. In the example, the loan carries a 5% interest rate and the bond a 2% rate. "We can empower the American people to reduce the burden of debt, realize the dreams they studied hard to achieve, and grow their retirement savings," Mr. Paul said in a statement. But using money from retirement accounts for anything other than financing post-work years draws skepticism. "We do have a concern with ensuring Americans save for a secure retirement," said Will Hansen, chief government affairs officer at the American Retirement Association. "This bill could potentially increase the amount of leakage from retirement plans. Tapping into them for other reasons could have disastrous implications for individuals down the road." A better way to address student debt is to refinance the loans at today's low interest rates, said Jamie Hopkins, director of retirement research at the Carson Group. "I'm not in favor of using retirement money to cover short-term needs," Mr. Hopkins said. "It's the classic problem of robbing Peter to pay Paul." Lately, retirement savings have become a piggy bank for other needs in the minds of legislators. Recently, Sen. Patrick Toomey, R-Pa., introduced a bill that would allow withdrawals to pay for long-term care insurance. "It's where the money is today," Mr. Hopkins said of retirement plans. But "we've got to encourage automatic savings, more long-term investments, not taking money out to cover these other expenses." [Recommended video:Financial wellness, a holistic way to serve clients] Burgeoning student debt also is capturing the imagination of lawmakers. Mr. Paul's measure joins several others that have been introduced this year. It's not clear whether any will gain traction. One thing that could slow down Mr. Paul's legislation is the way he's proposing to pay down student loans. "There would have to be a significant debate on whether the Paul bill increases retirement security or decreases retirement security," Mr. Hansen said.

Latest News

Married retirees could be in for an $18,100 Social Security cut by 2032, CRFB says
Married retirees could be in for an $18,100 Social Security cut by 2032, CRFB says

A new analysis finds long-running fiscal woes coupled with impacts from the One Big Beautiful Bill Act stand to erode the major pillar for retirement income planning.

SEC bars New Jersey advisor after $9.9M fraud against Gold Star families
SEC bars New Jersey advisor after $9.9M fraud against Gold Star families

Caz Craffy, whom the Department of Justice hit with a 12-year prison term last year for defrauding grieving military families, has been officially exiled from the securities agency.

Navigating the great wealth transfer: Are advisors ready for both waves?
Navigating the great wealth transfer: Are advisors ready for both waves?

After years or decades spent building deep relationships with clients, experienced advisors' attention and intention must turn toward their spouses, children, and future generations.

UBS Financial loses another investor lawsuit involving Tesla stock
UBS Financial loses another investor lawsuit involving Tesla stock

The customer’s UBS financial advisor allegedly mishandled an options strategy called a collar, according to the client’s attorney.

Trump's one big beautiful bill reshapes charitable giving for donors and advisors
Trump's one big beautiful bill reshapes charitable giving for donors and advisors

An expansion to a 2017 TCJA provision, a permanent increase to the standard deduction, and additional incentives for non-itemizers add new twists to the donate-or-wait decision.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.