When life throws unexpected challenges your way, it can feel natural to turn to your retirement accounts for quick cash. But before you withdraw funds, it’s important to understand the tax consequences of cashing out retirement before 59 ½.
At Gundersons CFO & Bookkeeping, we’ve seen how this decision can create painful surprises. Recently, two families dealing with personal loss tapped into retirement accounts to cover expenses. Instead of relief, they faced steep tax bills and penalties they hadn’t anticipated.
Here’s what happens when you withdraw early:
- Early withdrawal penalty – If you’re under age 59 ½, the IRS generally adds a 10% penalty on top of the taxes you already owe.
- Added taxable income – The withdrawal is treated as ordinary income, which means it can push you into a higher tax bracket.
- Unexpected tax liability – Without planning, you may owe thousands more than expected, right when money is already tight.
While there are limited exceptions for things like medical expenses or first-time home purchases, most early withdrawals are heavily penalized. Instead of raiding your retirement, it’s smart to work with a tax strategist who can help you explore alternatives—like loans, restructuring cash flow, or adjusting withholdings—that won’t jeopardize your long-term financial security.
At Gundersons CFO & Bookkeeping, we specialize in helping business owners and families avoid costly tax mistakes.
🎥 Watch the full video here
📅 Follow our Big Beautiful Tax Bill series for practical ways to stay compliant and reduce your tax bill. Click here to subscribe to our YouTube channel.
📚Want more practical tax tips for small business owners?
Check out our full Big Beautiful Tax Bill series and other blog posts here.
📞 Want to know how this applies to your business?
Book your free discovery call here, and we’ll build a tax strategy that works with your numbers.