Your 401(k) account is a sign of your hard work, consistent savings, and, of course, your ultimate transition into retirement. Enough money to retire is not only a nice safety net, but it may also assist ensure that you have enough cash to fund the hobbies, projects, and holidays you’ve been planning. But, before you start planning your retirement years, you should be aware that the IRS can seize your 401(k) to pay off tax arrears. When in tax debt, it’s good to be aware of all the repercussions your debt may have on your life. It is essential always to consult a tax professional to ensure the best possible outcome for you as a debtor. In this article, we’ll cover some basic information about levies on your 401k, the IRS’ rights to 401(k) garnishment and levy, your rights as a taxpayer, and how you can avoid these and other tax penalties.
Exploring An IRS Levy
An IRS levy enables the lawful seizure of your property. This is an unfettered right to confiscate your assets, including retirement funds and those stored abroad. An IRS levy is unequal to an IRS lien. The lien, a less harsh action generally done early in the seizure process, keeps your asset in place. To elaborate, you cannot withdraw money from an account with an active lien or transfer it to another management firm or bank. But it’s still your money. An IRS levy, contrary, is the document that outlines the seizure of an asset that is no longer yours.
As you might suspect, a levy on your 401k is nothing that happens occasionally, and the IRS will always prefer an option that causes the least amount of financial hardship to someone in tax debt. For example, the IRS already offers a fresh start program with specific options for payment plans or a reduction in total tax debt. For more information or a personal tax consultation, contact the tax professionals at Idealtax.com.
Why is the IRS trying to levy my 401(k)?
Even though retirement savings are shielded from creditors, the IRS is an exception. Most people are aware that creditors cannot touch any of your funds when you file for personal bankruptcy, and the general misconception is that it excludes the IRS from putting a levy on your retirement money. The usual rule is that if you can get to it, the IRS can also get to it.
The IRS will try to collect your 401k, pension, or retirement savings if you owe past taxes. An IRS levy is confiscating your assets to pay your tax burden. The IRS will generally send a notice and demand payment. If you disregard this warning, they will give you a final notice of intent to levy 30 days before the levy. Usually, before they undertake the seizure, they will analyze your assets, liabilities, income, and expenses to determine if they have enough equity to pay out your unpaid taxes, or else the seizure is forbidden.
The Internal Revenue Service has the authority to take all retirement savings, including IRAs, 401k plans, and other self-employed plans. There are presently no limitations in the IRS code against it. However, the IRS tends to try to find different solutions for significant tax burdens.
Some retirees have no other method to pay the taxes owing and the 10% early distribution penalty when they get the tax bill. If your primary income source is distributions from available funds in your retirement accounts, the IRS will expect you to sell the account to pay off the taxes.
Can the IRS levy my 401(k)?
In short, yes. While creditors like your bank typically cannot confiscate money from a retirement fund to satisfy the debt, the Internal Revenue Service does not follow the same standards. If you have an outstanding tax liability, the IRS may seize your property to settle it.
A tax levy gives the IRS the authority to collect a taxpayer’s assets, such as retirement funds, savings accounts, and earnings, to pay back taxes. In addition to these assets, the government may confiscate your home or automobile to reclaim tax payments owing. However, the IRS usually seizes other assets, like your car, before taking your 401k balance. Of course, the taxpayer must meet specific requirements before the IRS may garnish your 401(k) (k)
What can’t the IRS levy?
The IRS is banned from levying pension payments based on need, which implies that if you receive Supplemental Security Income from the Social Security Administration due to your senior status, the IRS is barred from levying the SSI payments. The Supplemental Security Income (SSI) program pays monthly benefits to certain individuals. SSI payments are also granted to adults 65 and older who are not disabled and fulfill the income requirements.
Retirement Benefits the IRS Cannot Levy
Again, the IRS cannot seize retirement funds that you do not have access to. Levies can only be attached to rights that are fixed and determinable. In other words, the IRS cannot confiscate your retirement account if your rights to it are not yet assured or if the value is not determinable.
Furthermore, the IRS cannot seize the cash you require now or soon. The IRS assesses this using financial standards that describe basic living costs. These requirements are not generous, but the IRS has established guidelines on financial hardship. To emphasize, the IRS is legally obligated to refrain from causing serious financial hardship and will always act in your interest to try and repay your tax debt. Ideally, you should establish plans to pay your tax debt before the IRS starts holding you to these requirements.
The IRS also considers lifespan tables. The agency takes into account average life expectancies and relatively low living costs. The IRS can confiscate the remainder if your retirement account can support more than those necessities. The agency will also consider extenuating circumstances about your finances and any other retirement accounts.