When You Need to Withdraw Retirement Money Early

No matter how much you might plan, unexpected events occur and sometimes you are forced to withdraw funds from your retirement savings early. While this may seem like an easy way to get cash quickly, early withdrawals can come with heavy penalties and costly tax consequences. Here’s some important info for people to consider before they dip into their hard-earned retirement savings.

Impact On Your 401(K), 403(B) And 457(B) Retirement Plans

You might have certain plans known as 401(k), 403(b) or 457(b) retirement plans and they can distribute benefits only when certain events occur. The plan’s summary description should clearly state when a distribution can occur. It will also state if the plan allows hardship distributions, early withdrawals, or loans.

Note the differences in these distributions.

  • Hardship distributions are withdrawals from a participant’s account made because of an immediate and heavy financial need and it’s limited to the amount necessary to satisfy that financial need. The need of the employee includes the need of the employee’s spouse or dependent.
  • Hardship distributions are includible in gross income unless they consist of designated Roth contributions. This is important so let’s make it clear. What you take out as a “hardship distribution” will be added to your gross income — and it’s taxable. The exception is if you have a Roth IRA, as these are funded with after-tax money, and there is no tax deduction for their contribution..
  • Distributions before the participant turn 65, or the plan’s normal retirement age, if earlier, may result in an additional income tax of 10% of the amount withdrawn. Let’s be clear about this point too. There can also be a 10% tax penalty.
  • Repaying hardship distributions back to the plan or rolling it over to another plan or IRA isn’t permitted. And let’s be clear about this: you can’t pay the money back to your plan. That means be certain you really need to withdraw the money before you take it out of your retirement plan.

Taking Out a Loan

Your retirement plan, however, might allow for loans. If it does you can repay the loans and if the loans are repaid within certain rules and schedules you can avoid taxes and penalties on these loans. Ask your plan administrator for details.

When You Have to Take Money Out

We should also mention when you have to take money out of your retirement account because you are required to do so. Under the law, taxpayers must make a required minimum distribution (withdrawal from their retirement account) each year beginning with the year that the taxpayer turns 72. If the taxpayer turned 70 and a half in 2019 then the taxpayer was also required to start taking distributions.

However, there are no required minimum distributions if your retirement was in a Roth IRA.

Ask your plan administrator for details about required distributions including how much you must withdraw.

Rules For IRAS And Ira-Based Plans

Let’s also discuss the rules for IRAs and IRA-based plans. You can take distributions from your IRA, SEP-IRA, or SIMPLE-IRA at any time. Taxpayers do not need to show a hardship to take a distribution from these types of retirement accounts. All you have to do is contact the bank or broker handling your account and ask for your money.

Early distributions occur when individuals withdraw money from an Individual Retirement Account or retirement plan before age 59½. These retirement plan distributions are subject to income tax. Individuals must also pay an additional 10% early withdrawal tax unless an exception to the early distribution tax applies. There were certain exceptions because of the Covid Pandemic. Ask your tax professional about these exceptions.

If you are ordered to take an early IRA distribution because of a divorce, not that early distributions are subject to regular income tax and the 10% penalty unless there are qualified exceptions. Again, ask your tax professional.

We Offer A Free Consultation

As always, we offer a free consultation about tax issues. Call us. We have tax attorneys, CPAs, and Enrolled Agents who can answer your questions, including how to resolve your IRS debt.


The IRS is now sending out special reminder letters to people who appear to qualify for the Child Tax Credit (CTC), Recovery Rebate Credit (RRC), or Earned Income Tax Credit (EITC) but haven’t yet filed a 2021 return to claim them. The letter, printed in both English and Spanish, provides a brief overview of each of these three credits.

Even if you aren’t required to file a tax return because of low income, you may still qualify for these important credits that will get you a check from the U.S. Treasury.

The only way to get the valuable benefits is to file a 2021 tax return.

This means that many people who don’t normally need to file a tax return should do so this year, even if they haven’t been required to file in recent years.

What Are These Credits?

The three credits include:

  • An expanded Child Tax Credit: Families can claim this credit, even if they received monthly advance payments during the last half of 2021. The total credit can be as much as $3,600 per child.
  • A more generous Earned Income Tax Credit: The law boosted the EITC for childless workers. There are also changes that can help low- and moderate-income families with children. The credit can be as much as $1,502 for workers with no qualifying children, $3,618 for those with one child, $5,980 for those with two children, and $6,728 for those with at least three children.
  • The Recovery Rebate Credit: Those who missed out on last year’s third round of Economic Impact Payments (EIP3) may be eligible to claim the RRC. Often referred to as stimulus payments, this credit can also help eligible people whose EIP3 was less than the full amount, including those who welcomed a child in 2021. The maximum credit is $1,400 for each qualifying adult, plus $1,400 for each eligible child or adult dependent.

Besides these three credits, many filers may also qualify for two other benefits with a tax return filed for 2021:

  • An increased Child and Dependent Care Credit: Families who pay for daycare so they can work or look for work can get a tax credit worth up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons.
  • A deduction for gifts to charity: Most tax-filers who take the standard deduction can deduct eligible cash contributions they made during 2021. Married couples filing jointly can deduct up to $600 in cash donations and individuals can deduct up to $300 in donations. In addition, itemizers who make large cash donations often qualify to deduct the full amount in 2021.

Call Us, We Can Help

Our tax defense attorney can help you file overdue and missing tax returns. We can answer your questions. We offer a free consultation.
If you have a low income now but have a tax debt you might be a candidate for the IRS Fresh Start Initiative and the IRS Offer In Compromise Program. We can tell you if you’re eligible in a free 15-minute phone call.

Getting IRS Penalties Removed

One of the goals we have at Legal Tax Defense when we represent a taxpayer before the IRS is to have their IRS tax penalties removed or reduced. It is possible to have IRS tax penalties reduced or removed, and the IRS has published guidance in its regulations for its own employees to follow about tax penalty abatement. You should know what these regulations say about tax penalty abatement.

First, the IRS representatives want to know the taxpayer’s reason and that reason should show a reasonable cause.

The IRS representatives also want to know that the taxpayer had a history of compliance with the IRS before the incidents that caused a penalty to be imposed. If the taxpayer has a history of the same penalty in previous years, the IRS agent could be skeptical that there is a reasonable cause.

IRS agents are told to consider first-time reasonable causes for penalty abatement, but a first-time reasonable cause does not mean penalties will be reduced or eliminated.

IRS agents will also consider whether the event that caused a penalty to be imposed was an event that was out of their control. A death, serious illness, or a widespread problem such as Covid pandemic shutdowns and a job loss could be events that could lead to penalties that could be reduced or eliminated.

The IRS regulations that its agents follow specifically mention death, serious illness, or unavoidable absence as reasons that should be taken under consideration for removing or reducing penalties.

For individuals, the IRS instructs its representatives to consider penalty abatement with this paragraph:

“If there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer’s immediate family (i.e., spouse, sibling, parents, grandparents, children).”

Death or serious illness can also be expanded as a reason for reducing penalties if the taxpayer had the sole authority or file a tax return, make payments, or make deposits for corporations, estates, trusts, and other legal entities.

Can You Present Your Case to The IRS By Yourself?

Can you present your case for reducing IRS tax penalties to the IRS by yourself? Yes, you can. The IRS regulations give you the right to do it. But the IRS regulations also allow you to have a representative to present your case to the IRS. We can discuss that with you when you call us for a free telephone consultation.

In many cases, taxpayers with a problem with the IRS can handle their own issues. But there comes a time and a cost when you might be better off with expert representation. We can discuss those options with you.

There are payment plans with the IRS that are very appropriate for taxpayers who owe smaller amounts of money to the IRS. But if your tax debt is high, or if your financial situation has changed so you can’t handle a tax debt on your own, our free telephone consultation can include information about seeking an IRS Fresh Start Program or an IRS Offer In Compromise program. And yes, we’ll also include having IRS tax penalties removed or reduced.

If you have a tax debt, call us today to be connected to a tax attorney for immediate tax relief.



Our tax attorneys, CPAs, Enrolled Agents, and tax experts can handle the tax obligations of your business. Right now, it might be very difficult for you to handle your business affairs with the IRS because the IRS has a paperwork nightmare that was caused by the Covid pandemic shutdowns and a lack of IRS staff.

The IRS announced on September 30th that it’s processing of tax returns and tax paperwork is still months behind schedule. And what is especially troublesome is that the IRS is now suggesting that some businesses and individuals will have to file their tax returns and paperwork again because the original filings could be lost.
What a headache for businesses. It’s like repeating previous tax seasons all over again.

There’s A Problem With Form 941

There is a particular problem with Form 941 that businesses submit to the IRS quarterly. Form 941 is the quarterly report that businesses file with the IRS that tells about the employee taxes that were withheld including Social Security taxes, and what was sent to the IRS. Now we’re finding out that some filings sent by snail mail could be lost, and even some electronic filings may have been lost.
The IRS says: “As of September 28, 2022, we had 3.6 million unprocessed Forms 941.  If you filed electronically and received an acknowledgment, you do not need to take any further action other than promptly responding to any requests for information. These tax returns are processed in the order received. Please don’t file a second tax return.”
That last sentence “please don’t file a second tax return” is what has businesses worried. The IRS is also reporting that some individual taxpayers may need to file tax returns again because the original filings can’t be found. Mostly the missing tax returns were sent by snail mail, and now the IRS is asking that any repeat submissions be made only electronically.

The IRS Is Behind On At Least 10-Million Tax Submissions

By the way, the IRS has 6.2-million individual tax returns it still hasn’t processed. Add 3.6-million unprocessed Form 941 filings, and the IRS has a backlog of at least 10 million returns and submissions.
Your accounting department may have its hands full with salaries, purchase orders, paying bills, and collecting invoices. Are they able to handle a repeat of a previous tax season? Call us and let’s talk about the services we can provide. We can be your tax office.