Why Marco Rubio raided his retirement account

Marco Rubio explained in under 90 seconds
Marco Rubio explained in under 90 seconds

Owning a home and having kids can give your wallet a real workout. Just ask Senator Marco Rubio.

He said this weekend that he cashed out a $68,000 IRA last year to finance an upgrade of some household appliances and to help with school expenses for his four children. Oh, and also to just give him a little mad money on the presidential campaign trail.

"We wanted to have access to cash in the coming year both because I'm running for president but also my refrigerator broke down. That was $3,000. And I had to replace the air conditioning unit in our home," the Florida Republican said on "Fox News Sunday."

What's more, he added, "My kids ... are getting closer to college and school is getting more expensive."

Except for the whole "running for president" bit, any parent can probably relate.

The thing is, though, cashing out your IRA is one of the most expensive ways to finance day-to-day needs.

If it's a traditional IRA and you're under 59-1/2, you'd owe both income taxes and a 10% early withdrawal penalty on the money. In Rubio's case, that could mean he'd lose more than 40% of his money in the account. More on that later.

If it was a Roth IRA he cashed out, that might have been a slightly better deal. Rubio would still owe taxes and a 10% penalty on any investment growth in the account, although not on his contributions since those were already taxed.

Either way, his IRA probably wasn't the best place to come up with some fast cash.

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It's not like he didn't have other, cheaper funds at his disposal, according to his 2014 annual financial disclosure form. He reported having between $151,000 and $365,000 in checking and savings accounts and a $100,000 to $250,000 home equity line of credit at 7.25% interest.

But instead he chose to hit up his IRA.

It's not clear which type of IRA Rubio had. (CNNMoney inquired but has not heard back from his office yet.)

If it was traditional, he would have essentially forfeited more than a third of his withdrawal.

He appears to have grossed just over $300,000 in income last year. That includes his $174,900 paycheck as a U.S. senator, plus income from rent, royalties and a university fellowship he holds as well as the $68,000 cash from closing out his IRA.

If that constituted the bulk of his family's household income (the disclosure form doesn't require spouses to detail earned income), Rubio's taxable income probably put him in either the 28% or 33% federal income tax bracket.

Let's assume he's in the 33% bracket. That means he probably had to pony up roughly $30,000 in taxes and penalties on his IRA cash-out. That means he would have netted only $38,000 from the original $68,000.

He also gave up decades of tax-deferred growth on that money, noted Mark Luscombe, principal federal tax analyst of Wolters Kluwers Tax & Accounting US.

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But don't feel too bad for Rubio.

He told Fox he has other retirement accounts, including a federal Thrift Savings Plan he contributes to from his Congressional paycheck. That account wasn't listed on his disclosure form because it is not required to be. Nor was the potential value of the pension he may be entitled to for serving in Congress.

In addition, he has a defined benefit pension from his years as a Florida state lawmaker -- worth an estimated $1,000 a month in retirement -- along with a retirement savings account worth between $1,000 and $15,000 from Florida International University, where he's a senior fellow.