If you owe taxes to the IRS, you might be wondering if it can be taken from your retirement savings, including money in your pension, 401(k), or other retirement accounts.
The short answer is yes.
Although these accounts are off-limits to creditors courtesy of the federal protections in place, the Internal Revenue Service is an exception. It can swoop in and seize funds from your retirement income or retirement nest egg, and it’s all legal.
Which of My Assets Can the IRS Levy?
The IRS has plenty of leeway under federal law when it comes to collecting back taxes that people owe to the government. It can legally garnish your savings from several types of retirement accounts, including stock bonus plans, 401(k)s, pensions, IRAs, and even self-employed savings such as Keogh and SEP-IRAs plans.
In addition, the IRS can legally levy civil service pension, Social Security payments, and other retirement benefits, to include retired railroad worker benefits. Even your savings and checking accounts can be levied to cover the amount needed to pay off the remaining tax debt. The IRS also has the discretion of levying assets such as second homes, real estate, jewelry, vehicles, and other possessions that surpass a pre-determined value.
What Can’t the IRS Levy?
The IRS can’t levy retirement assets that are based on a taxpayer’s needs. If you’re receiving Supplemental Security Income as an elderly or disabled person, the IRS cannot levy the payouts from the Social Security Administration.
With that said, the IRS will leverage its life expectancy and financial allowances tables in consideration of Individual Retirement Agreements (Publication 590). This allows them to calculate how much can be annually withdrawn to make the retirement account reach zero to cover future costs. This could affect extraordinary expenses like those required to cover special living arrangements.
The IRS is restricted from accessing retirement funds that you’re not currently entitled to. For instance, if you’re working for a certain company and the employer-sponsored plan doesn’t allow you to withdraw from the funds (or if you aren’t vested in the company’s plan yet), the IRS can’t make you file a request for the distribution of the accumulated amount until you can do so legally.
The IRS is also barred from depleting cash welfare public assistance payments and worker compensation benefits.
How Much of My Retirement Benefits Can the IRS Claim?
The government restricts the Internal Revenue Service from seizing all of your funds. It can, however, take as much as 15 percent of payments made through funds like Social Security Benefits. Several years back, the IRS began following a new policy of not going after these two pensions and instead claiming other assets in order to satisfy defaulters’ tax debts.
Will I Get a Notice?
There are stringent rules pertaining to the notices that should be sent before the IRS can levy a person’s retirement account. But once the notices have been filed, the IRS doesn’t need any court approval to seize the property.
How Can I Prevent the IRS From Levying My Retirement Funds?
There are two ways you can prevent the garnishment of your retirement funds:
- Pay off your debt
- Ensure that you can’t legally access the money in your retirement fund
If you go with the first option, you can settle the debt in full by submitting an Offer in Compromise, or you can work through a payment plan. A payment plan is a viable option when you’re unable to pay in full.
But when you cannot even pay back taxes via installments, an Offer in Compromise is the only option left. This debt relief program from the IRS allows taxpayers to submit lower offers for repayments. If the offer is accepted by the IRS, the offered amount will need to be paid in full.
The second option is based on a simple perspective: if you can’t access the money in your accounts, the Internal Revenue Service can’t either. So, find out whether any limitations are associated with your individual retirement plan’s requirements. For example, many plans will deny you access until you become disabled, retire, or pass away.
Also, as long as you remain employed with the company that enrolled you in an employer-sponsored program, the IRS cannot access your retirement account. Taking another job, however, might grant you (and the IRS) the ability to take funds from your account.
Entering into one of the above-described agreements with the IRS can help because as a general rule, the IRS cannot levy anything against taxpayers who have an Offer in Compromise or an installment agreement in effect or pending.
Even if the plan doesn’t say that you will pay tax liabilities in full (what is referred to as the Partial Pay Installment Agreement), the IRS won’t ask you to access the retirement funds (or levy them) if giving them up will cause significant financial distress.
Can a Tax Attorney Help?
In a word: certainly. How you respond to the notices sent by the IRS could determine whether you’ll have the financial means to take care of yourself after you retire. With a tax relief expert by your side, you can respond in an appropriate manner, weigh your existing options, and resolve your issues with the IRS in the most financially advantageous way.