Early Withdrawal of Retirement Funds

by | Mar 24, 2017 | Toby Talks Tax | 0 comments

The Boss frequently treats me to discounted rates for a sound advice.  But lately I’ve faced a few problems with my financial planning that I don’t want to discuss with her – if I confess that I’m thinking about digging into my retirement accounts to fund a few current necessities, like a gold-studded doggie collar, she’ll figure out that I ignored her previous counsel on budgeting.  That means I have to dig my way out of this problem of affording extravagance on my own.

The Big Question:  What happens if I take a premature withdrawal?  In other words, can I take out funds from my retirement accounts before I turn roughly 8 ½ years old (59 ½ in human time) without facing Uncle Sam’s standard rates for taxation on the total withdrawn, plus a 10%  penalty?

Uncle Sam’s not completely heartless, I’ve found.  Sometimes Uncle Sam understands that a taxpayer faces an “immediate and heavy financial need.”  Under those circumstances, if the taxpayer can’t dig up the necessary funds for emergencies in another way, and if the taxpayer doesn’t bite into the retirement account more than absolutely necessary, Uncle Sam won’t punish the taxpayer overly much for early withdrawals from retirement accounts.

The question is exactly what Uncle Sam thinks is an immediate and heavy financial need.  Luxury things probably won’t qualify, things like my dream puppy castle lined in plush silk, boasting a stainless steel milkshake machine, outfitted with T.V. viewing room, and featuring a magnificent ballroom (not for dancing, by the way – for ball-tossing).  So what will satisfy Uncle Sam’s prerequisites for early withdrawal?

  • Medical care costs for the taxpayer and dependents;
  • Expenses related to the first-time purchase of a home;
  • Educational expenses;
  • Payments to avoid eviction or foreclosure;
  • Funeral expenses; and
  • Certain costs to repair the primary residence.

The Boss takes pretty good care of me, I admit, what with portable condos and such, so I doubt if my living conditions fit the Hardship guidelines.  But even if my circumstances did fit, I would have to review the provisions of the particular retirement plan in question before I could ask for a distribution.

That means my best option to resolve my current constipated money flow is to see if The Boss will let me borrow a few doggy bones to tide me over until the next payday.  In the meantime, I promise to rework my budget to accommodate for emergencies, such as gourmet meat snacks and upgrades to my bedding.  The Boss loves to dish out instructions for living tax-compliant while taking advantage of all possible benefits to the taxpayer.  She’ll be pleased I asked for her input, and I can save face and paw by not divulging my lack of financial savvy!


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