Early 403b withdrawal has me hit with 10k in taxes - how is this possible?

But wouldn't the 10% penalty only apply to the $23k withdrawal amount? So that would be $2,300. I'm confused how the total tax bill could be so high even with the penalty. Is there something else going on?

The 10% penalty is indeed only on the $23k withdrawal, which is about $2,300. The bigger issue is that the entire withdrawal gets added to your income for tax purposes. When you add $23k to your already high combined household income of $265k, that entire $23k gets taxed at your highest marginal tax rate, which is likely 32% or 35% federal. So you're looking at roughly $7,500-$8,000 in federal taxes on that withdrawal, plus the $2,300 penalty, totaling around $10k federal. The $5.5k withholding wasn't enough to cover this. The remaining $2.7k is state tax, which varies by location but makes sense if you're in a state with income tax rates around 9-10% for your income level.

I'm in a similar situation right now and freaking out. How exactly does the hardship exemption work? Does it eliminate the 10% penalty completely if it was for medical?

I've never heard of this service. Is it legit? I'm always skeptical of online tax tools that claim to find magical deductions that professional preparers miss.

The hardship exemption for medical expenses can help avoid the 10% early withdrawal penalty (not the regular income tax) if the medical expenses exceed 7.5% of your adjusted gross income. So it doesn't eliminate all the tax implications, but can save you that penalty portion if you qualify. Totally understand the skepticism! I felt the same way initially. What convinced me was they don't actually prepare your taxes - they just analyze documents you already have and point out things you might have missed. They found several deductions my regular tax guy overlooked, including the medical expense exemption for the penalty and some business expenses I didn't realize I could claim.

How exactly does this work? I tried calling the IRS last week and hung up after being on hold for 45 minutes.

Yeah right. No way this actually works. The IRS is impossible to reach. Sounds like a scam to get desperate people's money.

It's basically a service that navigates the IRS phone tree for you and holds your place in line. When they're about to connect you, you get a call. It saved me from having to sit on hold for literally hours. I get the skepticism - I thought the same thing initially. But it's not like they're claiming to be the IRS or anything shady. They just handle the wait time part, and then you talk directly to actual IRS agents. For me it was worth it because I needed to set up a payment plan before the deadline and couldn't afford to keep missing work to sit on hold.

Thank you for this list! The withdrawal was indeed for medical expenses for my mom, but I'm not sure if it would qualify since it wasn't for me or my husband directly. Do you know if medical expenses for parents would count toward this exception?

For the medical expense exception, it generally needs to be for you, your spouse, or your dependents. If your mother qualifies as your dependent for tax purposes (which has specific requirements about support provided and living situation), then her medical expenses could potentially qualify. If she's not your dependent, unfortunately those expenses likely wouldn't qualify for the exception. But it's worth checking with a tax professional to see if there are any other options based on your specific situation.

100% agree. The IRS is actually pretty decent to work with if you're proactive. I set up a payment plan for a similar situation and it was surprisingly easy. The interest rate is way better than credit cards too.

Thank you - I definitely won't ignore it. I'm looking at either a payment plan or possibly taking a low-interest personal loan from my credit union to pay it off. I'm just so frustrated that what I thought was a responsible withholding amount wasn't even close to enough.