401K Levy to Pay Taxes?

[ddcompletesme]

What is the name of your state (only U.S. law)?

I owe back taxes, roughly $6K plus and I live in CA. (I still need to file two years, which I am going to do soon). I have a 401K that has $17K and the IRS is attempting to levy my bank account assets. I am really not in a position to have a hold on my funds, unfortunately because I am a working student and struggling to live paycheck to paycheck. If I ask them to levy my 401k, would that be a solution to fix my problem? What would be the likelihood that they would go that route? I am 26 and figure this is a better way to pay the IRS since I am still young and can re-establish my retirement in the years to come. Any advice?

 

[sandyclaus]

What is the name of your state (only U.S. law)?

I owe back taxes, roughly $6K plus and I live in CA. (I still need to file two years, which I am going to do soon). I have a 401K that has $17K and the IRS is attempting to levy my bank account assets. I am really not in a position to have a hold on my funds, unfortunately because I am a working student and struggling to live paycheck to paycheck. If I ask them to levy my 401k, would that be a solution to fix my problem? What would be the likelihood that they would go that route? I am 26 and figure this is a better way to pay the IRS since I am still young and can re-establish my retirement in the years to come. Any advice?

Here's a thought - why not make a hardship withdrawal from your 401k yourself and just pay off the taxes?

 

[LdiJ]

What is the name of your state (only U.S. law)?

I owe back taxes, roughly $6K plus and I live in CA. (I still need to file two years, which I am going to do soon). I have a 401K that has $17K and the IRS is attempting to levy my bank account assets. I am really not in a position to have a hold on my funds, unfortunately because I am a working student and struggling to live paycheck to paycheck. If I ask them to levy my 401k, would that be a solution to fix my problem? What would be the likelihood that they would go that route? I am 26 and figure this is a better way to pay the IRS since I am still young and can re-establish my retirement in the years to come. Any advice?

Off the top of my head I don't believe that anybody, not even the IRS can levy a retirement account. However, if you voluntarily make a withdrawal to pay taxes the penalty for early withdrawal is waived. You could also take a loan from your 401k if withdrawals are not allowed, in order to pay the taxes.

 

[cbg]

Here's a thought - why not make a hardship withdrawal from your 401k yourself and just pay off the taxes?

Um, that would be because by law, there are only six reasons why the IRS will permit a hardship withdrawal from a 401(k) and paying off back taxes is not among them.

IF the OP's 401(k) document permits loans, a loan is a possibility but not a hardship withdrawal.

 

[LdiJ]

Um, that would be because by law, there are only six reasons why the IRS will permit a hardship withdrawal from a 401(k) and paying off back taxes is not among them.

IF the OP's 401(k) document permits loans, a loan is a possibility but not a hardship withdrawal.

That is not exactly correct...one of the exceptions to the 10% penalty for early withdrawal of a qualified plan is to pay taxes if the taxpayer is in a levy situation with the IRS. So obviously it can be done. The question in my mind is if the 401k can be levied directly or not. I am still looking for an answer on that one.

Ok...it now does appear that they CAN levy the 401k directly. However it also appears that they must do so "judiciously", and apparently there is not a lot of guidance for the agents to use to determine judiciousness. Therefore many of them opt not to levy a 401k or IRA.

I would go for the hardship loan...the advantage to that is that you do not have to pay taxes on the loan and you will be actively repaying yourself with a payroll deduction.

 

[cbg]

There is a difference between a hardship withdrawal and a loan.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions#2

From the IRS's own words. Please show me where you see tax levies on that list.

 

[tranquility]

That is not exactly correct...one of the exceptions to the 10% penalty for early withdrawal of a qualified plan is to pay taxes if the taxpayer is in a levy situation with the IRS. So obviously it can be done. The question in my mind is if the 401k can be levied directly or not. I am still looking for an answer on that one.

Ok...it now does appear that they CAN levy the 401k directly. However it also appears that they must do so "judiciously", and apparently there is not a lot of guidance for the agents to use to determine judiciousness. Therefore many of them opt not to levy a 401k or IRA.

I would go for the hardship loan...the advantage to that is that you do not have to pay taxes on the loan and you will be actively repaying yourself with a payroll deduction.

However, they don't go after the amount deposited and they can only levy amounts the taxpayer can withdraw.

 

[davew128]

Sigh, so many responses, so little on point remarks.

OP, yes the IRS can levy a 401(k). No, they won't ordinarily under any circumstances do it because it creates enormous pressure publicly that makes them out to be the bad guy.

That said, if you request in writing that they do so, they will. It can be expedited as the request must go up to like the regional director or something (see my comment above), but if you specifically request that they do it, they will.

Now the bad news is that the levied amount is going to be income next year. The good news is amounts withdrawn due to an IRS levy are an automatic exception to the early distribution penalty.

Yes I've done this for a client in the past when the situation warranted it.

 

[tranquility]

Sigh, so many responses, so little on point remarks.

OP, yes the IRS can levy a 401(k). No, they won't ordinarily under any circumstances do it because it creates enormous pressure publicly that makes them out to be the bad guy.

That said, if you request in writing that they do so, they will. It can be expedited as the request must go up to like the regional director or something (see my comment above), but if you specifically request that they do it, they will.

Now the bad news is that the levied amount is going to be income next year. The good news is amounts withdrawn due to an IRS levy are an automatic exception to the early distribution penalty.

Yes I've done this for a client in the past when the situation warranted it.

Perhaps you may declare what you sigh about. For example, my answer was based on an authoritative text I have the competence to read and understand.

While I don't deal with this much (and respect davew128 immensely for his expertise here), I am not sure what the point is.

Give some advice Dave, don't give epemorous disagreement.

 

[FlyingRon]

That is not exactly correct...one of the exceptions to the 10% penalty for early withdrawal of a qualified plan is to pay taxes if the taxpayer is in a levy situation with the IRS.

That's for IRAs not 401(k).

 

[LdiJ]

That's for IRAs not 401(k).

I looked it up before I posted, both apply for that exception.

 

[cbg]

You didn't look at my link at all, did you?

Hardship withdrawals can be taken ONLY for the following reasons, and this is cut and pasted directly from the IRS website:

(1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence.

Now, the employee who is taking a withdrawal for one of these reasons can take sufficient to pay the taxes associated with the distribution. But taking a distribution from a 401(k) to pay back taxes is not an approved IRS reason.

 

[LdiJ]

You didn't look at my link at all, did you?

Hardship withdrawals can be taken ONLY for the following reasons, and this is cut and pasted directly from the IRS website:

(1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence.

Now, the employee who is taking a withdrawal for one of these reasons can take sufficient to pay the taxes associated with the distribution. But taking a distribution from a 401(k) to pay back taxes is not an approved IRS reason.

The last two posts weren't talking about hardship withdrawals. The last two posts were talking about whether or not the 10% early penalty applied if the IRS levied the 401k.

 

[cbg]

So you concede that you were mistaken when you told the poster to apply for a hardship withdrawal?

Then my work here is done.

 

[LdiJ]

So you concede that you were mistaken when you told the poster to apply for a hardship withdrawal?

Then my work here is done.

Well, I never used the word hardship and I mostly talked about a 401k loan and/or a 401k levy, but yes, I guess that you did make your point.