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401K early withdrawal

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withonel

Member
What is the name of your state? CA
I have $6K in a former employer's 401K plan.
I owe $5K+ to the IRS for 1996/97 taxes.
I'm current on taxes now and expect to receive a refund (at least on paper) next year.
If I cash out the 401K to pay the IRS bill I know the $6K becomes taxable income but won't it balance out because I can deduct taxes paid on previous years?
I am so sick of the watching the interest add up and can't afford to make payments monthly to outweigh the interest. I'm thinking pulling the money out of the 401k to get the monkey off my back may be the best thing...even with the 10% penalty.
Any advice?
 


abezon

Senior Member
You might ask the IRS to place a levy on the 401k money. (See how much it would add to your bill first.) If the IRS levies the pension plan & you then withdraw money to satisfy the levy, you avoid the 10% penalty.
 

withonel

Member
let the IRS levy?

Won't that be a huge negative on my credit report? How long does that stay on? I do already have messed up credit, but just about everything will be aged off within 3 years. Would it make sense to do that?
Thanks.
 

withonel

Member
Called the IRS

I found out that levy's do not go on your credit report, liens do, not levy's. The first person I talked to said that yes they could levy my 401k to pay off the bill and avoid the 10% penalty...she said I needed to talk to another dept to set it up and gave me a number.

I called the number, got a new guy, he said he didn't think they could levy my account to pay this joint bill because the account is in my name and the bill is under my ex-husband's social security number. I am liable for the tax because it's a joint return, but I have to take the 10% penalty because I want to pay it with my money. He says I have to talk to the collection dept and see what they can do.
So I call again, this time the person tells me that the IRS doesn't levy IRA's or 401K's to pay tax bills. Even if I want them to, they won't do it...it involves a director's approval and they don't want to get involved.
I'm thinking of actually going to the local office and see if they can help. Any additional advice?
 

abezon

Senior Member
Welcome to to the joys of your givernment at work. If you don't like the answer person A gives you, just ask person B.

There is no reason they can't levy your 401k to collect a tax bill from a joint return you filed with your ex. The tax bill is both of yours. It's not your ex's bill just because his name was listed first on the tax return. Tell the IRS they're being sexist & you'll file a compleint if they don't stop it.

The IRS levies retirement accounts all the time. That's why Congress specifically created an exception to the 10% penalty when the IRS forces the withdrawal. The IRS may prefer to levy other things first, like your house or wages. Go visit the local office to see if they can help. Also, call collections directly and ask what you have to do before they place a levy on your retirement plan & if they'll place the levy earlier with your consent. Then you can decide whether to jump through the hoops or just take the 10% hit. Recall that we're talking about less than $600 penalty plus the taxes on $6000 income. Also be aware that some money will be withheld from the distribution to cover taxes, so you won't get the full $6000.
 

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