How Can I Protect My Pension And Retirement Account Funds
Getting into a situation with the IRS due to delinquent tax debt is always a daunting experience and settling your tax debt issues with the IRS needs to be a top priority. Fortunately, you can leverage a range of tax relief options that the IRS provides to protect your pension and retirement funds. These options include:
- Pay Off Tax Debt: You can source funds from elsewhere and pay off the back taxes. Ideally, you can use your savings or liquidate assets to settle your tax debt in a single payment.
- IRS Payment Plan : You can also get into an agreement with the IRS that allows you to pay off your tax debt in affordable monthly installments. The IRS Payment Plan provides two installment plans a short-term payment plan that lasts three months and a long-term installment agreement plan that lasts for between 72 to 84 months.
- Offer in Compromise: An Offer in Compromise is an agreement between you and the IRS for you to settle your tax debt for less than the total back taxes amount you owe.
- Hardship Status : You can request Currently Not Collectible . With this option, you are exempted from making immediate tax debt payments until your financial status improves substantially.
What Do I Do To Keep My 401k Pension Or Retirement Money
The best way to protect your 401k, pension and retirement money is to setup a payment plan to pay your back taxes. However, if your deliberately didnt pay taxes, the IRS will seize your money for sure. Although, proving you need the money for living expenses can lower the amount of money they can take.
Move The 401 To Your New Employers 401
If you change companies, its typically no problem to rollover your old retirement plan into your new employers 401. With a little bit of paperwork, the old plan administrator can simply shift the contents of your account directly into the new plan account with a direct transfer. This custodian-to-custodian transaction is not considered taxable.
Another option is to elect to have your balance distributed to you in check format, which you can then deposit into your new 401 account within 60 days, without paying the income tax. If you are a sole proprietor, freelancer, or entrepreneur, you may also consider setting up your own Solo 401 for yourself at this point. If you are in the middle of a lawsuit or worry about future claims against your assets, leaving your money in a 401 is going to offer better protection against liquidation.
Dont Miss: How To Increase 401k Contribution Fidelity
You May Like: How To Withdraw Your 401k From Fidelity
Cashing Out Your 401k While Still Employed
The first thing to know about cashing out a 401k account while still employed is that you cant do it, not if you are still employed at the company that sponsors the 401k.
You can take out a loan against it, but you cant simply withdraw the money.
If you resign or get fired, you can withdraw the money in your account, but again, there are penalties for doing so that should cause you to reconsider. You will be subject to 10% early withdrawal penalty and the money will be taxed as regular income. Also, your employer must withhold 20% of the amount you cash out for tax purposes.
There are some exceptions to the rule that eliminate penalties, but they are very specific:
- You are over 55
- You are permanently disabled
- The money is needed for medical expenses that exceed 10% of your adjusted gross income
- You intend to cash out via a series of substantially equal payments over the rest of your life
- You are a qualified military reservist called to active duty
Can The Irs Take My 401
Estimated Reading Time: 7 MinutesIf youve worked your entire life to save money for your retirement, it can pose a serious issue if you receive a notice of delinquent federal taxes from the IRS. It may feel unfair and worrisome for both yourself and your family. You may wonder how it is possible for the IRS to take such action in the first place.
Recommended Reading: How To Move 401k From Old Job
Hardships Early Withdrawals And Loans
Generally, a retirement plan can distribute benefits only when certain events occur. Your summary plan description should clearly state when a distribution can be made. The plan document and summary description must also state whether the plan allows hardship distributions, early withdrawals or loans from your plan account.
Recommended Reading: How To Transfer 401k When Changing Jobs
The Feds Can Tap Your 401 Funds For Taxes More
Your 401 is not exempt from garnishment or seizure if you owe federal income taxes in arrears. In general, if you are eligible to take a distribution from your 401, even with penalties, the IRS can seize it to settle your debt. However, if you are not permitted to take distributions from your account due to age or other plan restrictions, the IRS is not allowed to override these regulations.
Other levels of government lack the power of the federal authorities. For the most part, you cannot be forced to use funds in your 401 money to pay state and local income, property, or other taxes.
Though a less common reason than overdue taxes, the federal government can also potentially seize or garnish your 401 if you have committed a federal crime and are ordered to pay fines or penalties. In addition, you may be ordered to withdraw from your plan if you are found, in a civil or criminal judgment, to have mishandled your plan or committed fraud.
While the IRS can obtain funds from your 401 to pay back taxes, state, and local governments do not enjoy that same power.
Don’t Miss: How Do I Contact Adp 401k
Secure Your Retirement With A Gold Ira
A Gold IRA is a retirement account that allows you to invest in gold and other precious metals as opposed to stocks, bonds, and other funds. Gold IRAs offer the same advantages as traditional IRAs, with the added benefit of protecting you from government tax schemes.
When investing in a Gold IRA, you only pay taxes on your contributions, not the gains. So while with a traditional IRA, you will be paying taxes on any withdrawals, with a Gold IRA, you are only taxed based on the value of the gold at the time you bought it.
With inflation on the rise and uncertainty in global markets, investing in a gold or silver IRA with Noble Gold is an excellent way to secure your future.
When The Creditor Is A Commercial Entity
When it comes to federal benefit payments, the answer is no. Were talking Social Security, Veterans Affairs benefits, railroad retirement benefits, and Office of Personnel Management retirement benefitsespecially if said creditor has issued you a credit card or an auto loan and your payment is late. Creditors holding medical bills, along with personal and payday loans, are also prohibited from garnishing these benefits. Thats according to Section 207 of the Social Security Act. Its the law.
In regard to 401s and IRAs, the former are generally safe from garnishment by commercial creditors as long as the money stays in the account, thanks to the Employment Retirement Income Security Act of 1974 , while the first million dollars in your IRA are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 .
If youre not ordered to pay back taxes or child support, then the bank has to review the history of your account for the two months prior to receiving the garnishment order. If your Social Security or other protected benefits have been directly deposited into your accounts within that two monthsthe so-calledlook-back periodthe bank must protect the funds up to the total of the direct deposits. Youre free to spend it on anything.
However, if youre still working, your creditor can garnish your wages and, depending on the state where you live, other allowable assets you may have, such as a house or car.
You May Like: Can I Rollover My Current 401k To An Ira
Does Irs Forgive Tax Debt After 10 Years
In general, the Internal Revenue Service has 10 years to collect unpaid tax debt. After that, the debt is wiped clean from its books and the IRS writes it off. This is called the 10 Year Statute of Limitations. … Therefore, many taxpayers with unpaid tax bills are unaware this statute of limitations exists.
Why Is The Irs Trying To Levy Or Take My 401k Pension Or Retirement Money
Even though retirement accounts are protected from creditors, the IRS is an exception. The general rule is that if you can get it the IRS can get it too.
The main reason the IRS would try to levy your 401k, pension or retirement accounts is because you owe back taxes. An IRS levy is basically a seizure of your assets to cover your tax debt. The IRS will usually send a notice and demand for the payment to be made. If you ignore this notice, they will send a final notice of intent to levy which will be issued 30 days in advance before the levy happens. Usually, before they perform the seizure, they will investigate assets you own to see if they have sufficient equity to pay off your back taxes, or else the seizure is prohibited.
The Internal Revenue Service can seize all types of retirement accounts, including IRAs, 401k plans, and other self-employed plans like Keogh plans and SEP-IRAs. There are currently no prohibitions in the IRS code against it.
Many clients come to me who have been forced to live off of their retirement accounts because of being laid off. When they get the tax bill for the taxes owed and the 10% early distribution penalty, they have no way to pay the amount owed. If your only source of money is taking distributions from money still available in your retirement accounts, the IRS will expect you to liquidate the account to pay off the taxes.
Don’t Miss: How To Add Money To 401k
Get Help With Back Taxes
Don’t let the IRS levy your retirement accounts or garnish your pension payments. The agency typically only garnishes these sources in severe situations, but if you ignore your tax liability long enough, the agency may decide that the situation is severe. Usually, you will receive a notice of intent to levy before the IRS takes your assets. To be on the safe side, you should reach out for help as soon as possible.
Get help before the IRS seizes your assets. At TaxCure, we have curated a directory of local tax professionals. Using our search feature, you can look for a tax pro based in your area with the experience you need. Protect yourself find a local tax pro to help you today.
The Retirement Equity Act
In other contexts we have noted that it sometimes comes to pass that only one spouse of a married couple is liable for a particular tax debt. In that situation it may be useful to argue that the legal rights of the non-liable party in his or her spouses pension benefits decrease the realizable value of those benefits. Specifically, the Retirement Equity Act of 1984, or REA, provides that a husband or wife has an enforceable right in his or her spouses pension. Among other consequences, these rights result in the requirement that the non-participant spouse consent to any lump sum distribution to be made to the participant. For the same reason, qualified plans are required to offer as the normal form of benefit a joint and survivor annuity, under which payments will continue to the non-participant spouse even after the death of the plan participant.14
You May Like: Where Is My 401k Account
Can The Irs Garnish My Retirement Pay
The IRS can levy against employer-sponsored plans such as 401s.
If you owe the Internal Revenue Service for overdue federal income taxes, the IRS can garnish your assets to get payment. This procedure is called a levy. When the IRS levies against your assets, it may go after any funds in your retirement account, or any retirement payments you receive. Some regulations restrict the amount the IRS can levy against other rules specify when the IRS can collect the funds.
Can The Irs Levy My 401
The short answer is yes. Even though retirement accounts are often sheltered from creditors under federal and state law, this protection ceases to exist when the creditor is the Internal Revenue Service.
The IRS can and will garnish your assets to ensure payment on your debt. They will initially attempt to seize a variety of different assets, but If no other options exist they will levy your 401k for payment.
Recommended Reading: How To Use Your 401k Money
Recommended Reading: What Happens To Your 401k If You Leave Your Job
Can The Government Seize My Retirement Savings
Unfortunately, the simple answer is yes. However, Congress would first have to pass new laws allowing this to happen.
It would be difficult to pass a law allowing the government to seize your entire retirement account for no reason. However, several bills have been introduced to Congress over the past ten years designed to generate revenue for the government by finding new ways to tax retirement accounts.
Can The Irs Take Your 401 For Back Taxes
Your 401 is a symbol of your hard work, steadfast savings, and of course, your eventual transition into retirement. Having enough money to retire comfortably is not only a great safety net to have, but it can also help ensure that you have plenty of cash to afford the hobbies, projects, and vacations youve been planning on. But before you begin planning out your sunset years, theres something you should know the IRS can take your 401 to settle up tax debts.
In this post, well be discussing the IRS rights to 401 garnishment and seizure, your rights as a taxpayer, and how you can avoid these and other tax penalties. To find information on a specific topic, use the links below to jump ahead, or read through for a comprehensive take on the topic.
Also Check: How Much Can I Rollover From 401k To Roth Ira
How To Protect Yourself
The information above should help you stand up to the IRS if you are in collections and wish to preserve your retirement income or assets. Proving a hardship can help dissuade the IRS from levying in either scenario, but until youre in a repayment plan or some other formal resolution agreement, the IRS will still do what it canby means of other levies and garnishmentsto get the money its owed. Moreover, the further you are away from being at retirement age, the less receptive the IRS will be to this argument.
The best solution is almost always to enter into an agreement with the IRS for resolution of the tax liability. With few exceptions, no levy can be made against a taxpayer that has an installment agreement or Offer in Compromise pending or in effect. Even if the payment plan will not pay the liability in fullknown as a Partial Pay Installment Agreementthe IRS should not levy the retirement funds or ask you to if the asset is necessary to fund the payment agreement or if selling/borrowing against the asset would result in an economic hardship.
Do you have questions about back taxes? Our experts focus on nothing else but resolving your tax liabilities.
What The Irs Cannot Levy
The IRS is restricted from levying against retirement benefits that are based on need. Therefore, if you receive Supplemental Security Income through the Social Security Administration because you are elderly, the IRS cannot levy against those SSI payments. The IRS also cannot access funds that you are not currently entitled to. So if you are still employed and your employer-sponsored plan does not permit withdrawals, or if you are not yet vested in the plan, the IRS can’t make you request a distribution of the funds until you have a legal right to do so. In the meantime, the agency can levy against the account.
Recommended Reading: Can You Take Money From 401k Without Penalty
Can The Irs Garnish My Pension Or Retirement Accounts For Back Taxes
The IRS can exercise immense powers when it comes to collecting back taxes. If you owe the IRS federal taxes, the agency can garnish your assets through a procedure called a levy. When the IRS decides to levy your assets, it may seize funds from your pension and other retirement accounts. This piece covers essential information about the IRS levy and garnishment programs targeting pension funds and retirement accounts.
Bankruptcy And Retirement Account Levies
Taxes must meet specific rules to be discharged through bankruptcy. If you have taxes discharged in bankruptcy, the IRS may still have the ability to levy your retirement accounts to cover those taxes.
If the IRS filed a tax lien before you filed bankruptcy, the IRS has the right to seize accounts that were exempt from the bankruptcy case. Additionally, the IRS also seize retirement accounts that were excluded from bankruptcy even if the liens were not filed on time.
Recommended Reading: What Is The Difference Between An Ira And A 401k
Protecting Retirement Accounts From Irs Seizure
Retirement accounts are considered to be an investment that is protected from creditors. But here is an interesting question from a reader about a big exception to that rule :
Several years ago, I liquidated all of my retirement money to pay for gambling trips to the casinos. My husband and I had a fairly substantial amount of tax due from the early withdrawal penalties. Now, I have been contacted by an IRS Revenue Officer, who is demanding that my husband liquidate his retirement money to pay our taxes. It is the only savings we have, and I thought it was safe. My question is: Can the IRS seize retirement accounts?
The IRS can seize retirement accounts, including 401k plans, IRAs, and self-employed plans like SEP-IRAs and Keogh plans. There are no prohibitions in the Internal Revenue Code against it.
The key to defending retirement accounts from IRS seizure is to understand that the IRS stands in your shoes, and can only get what you can get. This means that if you cannot get to the retirement money, the IRS cannot get to it either.
Many retirement plans do not provide for present rights to the money, allowing access only at separation from service, retirement or death/disability. If you are still employed, you likely have no ability to withdraw the retirement money, and the IRS has no ability to seize it. Reference is found in Internal Revenue Manual 126.96.36.199, which governs IRS seizures of retirement accounts.