Why is money withdrawn from a retirement account taxed?

I decided that shortly after tax time is a good time to answer this question because I always have clients in this predicament every year!  I want to use this answer as a warning to anyone thinking of making an early withdrawal from any type of retirement plan or account.  When you withdraw money from a 401-K plan or any retirement plan before you are supposed to, you are assessed a 10% penalty for early withdrawal in addition to having to pay income tax on the money withdrawn.  This creates a double tax liability for all early withdrawals.  This is the primary reason you should never dip into your retirement plan early unless it is a dire emergency.   You can and should request that at least twenty (20%) to twenty-five (25%) per cent of the amount withdrawn be withheld by the administrator at the time of withdrawal and paid to the IRS as estimated tax.  Your administrator can help you determine the amount to be withheld.  This is similar to the withholdings each week or month from your paycheck.  If you do this, you will not have such a huge liability at tax time.  To answer your specific question, we will probably have to prepare an Installment Agreement for you, or perhaps an Offer In Compromise, depending on the amount owed.  We can also try to abate the penalties involved, due to your ignorance of the tax problem. I will be happy to discuss your problem with you and tell you how I can help.