Thank you very much. I wouldn't have expected payment since you have worked out your question mostly by yourself, but I appreciate it and I will try to provide worthwhile advice.
I think that your decision is very wise. Since some of your money is in stocks, selling those stocks now will lock in the losses you've probably experienced in the last few years. By keeping those stocks, you may be able to recover some of those losses.
The tax money that would be withheld from your IRA (the 20%) if you withdrew the money would be sent to the IRS to offset your 2011 taxes and you should get much of it back, but the money you withdraw would be considered taxable income and would increase your taxes this year.
Paying extra money on the principal of your car loans is very smart. You need to check and make sure that neither of the loan have an early payoff penalty, but, as long as they don't have penalties for early payoff, you can pay extra money on your loan payment, designated to be applied to the principal, and pay off your loan more quickly saving interest payments without paying any additional taxes. Make sure that you identify on your payment that the extra money is to go to pay the principal, otherwise some companies will apply that money to the interest. You may want to check with your loan companies on how to pay extra money toward the principal, so that they don't have any excuse to not put the extra money where you want it.
I think that keeping the lump sum of money available is safer than paying off your loans right now. It will cost you a little bit of extra money, but you're going to be dependent on your savings to pay your bills in a few years, and there is no way to get the money back once you use it to pay off the loans if an emergency arises.
If you had more resources or were in a situation where you could recover if something goes wrong with your finances, paying off the loans would make sense. But in your situation, I think that your decision to be conservative is very wise.
I wish I could have helped you more. You might look at some of the potential pitfalls with Medicare and your wife's health insurance. If one of you goes on Medicare before the other, you may be paying Medicare premiums and still paying health insurance premiums. My spouse is going on Medicare before I do, but our health care premiums through our employer aren't dropping even though only one of us will be covered.
Please let me know if you need any more information about this topic. It has been a pleasure working with you. Thank you.