Can the IRS Take Your 401K For Taxes Owed?

A 401(k) is a popular retirement savings vehicle offered by large and small businesses across the country. Your 401(k) retirement accounts are generally safe from commercial creditors, but the IRS plays by different rules. 

So, can the IRS take your 401(k)? The short answer is yes – the IRS can potentially levy your retirement savings if you fail to address your tax debt. To get help now, contact us at the W Tax Group or keep reading to learn more.

What Is a 401(k) Plan?

A 401(k) is a type of tax retirement plan offered by many employers throughout the country. There are several different 401(k) plans that employers can offer, usually depending on the size of the business. Each plan comes with slightly different rules that need to be met in order to qualify for tax benefits.

• Traditional 401(k) – Employees can have pre-tax elective deferrals deducted from their paycheck, with the option for employers to match some or all of their employees’ contributions.
• Safe Harbor 401(k) – Similar to a traditional 401(k), but employer contributions are mandatory rather than optional, and administrative requirements are lower.
• SIMPLE 401(k) – This is essentially a Safe Harbor 401(k) but for small businesses with fewer than 100 employees.

Can Creditors Seize Your 401(k) for Debts?

All types of 401(k) plans are protected from commercial creditors (i.e. banks and credit card companies) under the Employment Retirement Income Security Act of 1974 (ERISA). This special legal status ensures that the funds in your 401(k) are legally owned by your employer until you begin to withdraw them as income. And until then, your employer cannot legally release the funds to anyone else. This protection remains even against bankruptcy.

However, once you begin to withdraw from your 401(k), the funds become income, and at that point, commercial creditors could attempt to seize your withdrawals.

But where your 401(k) is not protected at all is when it comes to IRS levies. Unfortunately, your 401(k) is not exempt from garnishment or seizure if you are carrying outstanding income tax arrears. 

When Can the IRS Seize Your 401(K)?

If you have unpaid taxes, the IRS can issue a levy and seize your assets. An IRS tax levy is a legal seizure of a person’s property to satisfy a tax debt. This allows the IRS to take assets, such as bank accounts, wages, or retirement savings. 

However, before a levy can be issued, the IRS must provide several formal notices, and give the taxpayer an opportunity to address the debt by other means. The IRS cannot levy your assets until the agency sends you a Final Notice of Intent to Levy With Your Right to Appeal.

Can the IRS Seize Other Retirement Accounts?

Legally, the IRS is entitled to seize or garnish funds from any of the following retirement accounts, to cover unpaid tax liabilities:

• 401(k)
• Independent Retirement Account (IRA)
• SEP-IRA
• Pension payments
• Company profit-sharing plans
• Eligible deferred compensation plans
• 403(b) plans

Generally speaking, if you are eligible to make a withdrawal from your 401(k), then the IRS could choose to seize it to settle your debt. However, if there are currently withdrawal restrictions on your account, the IRS will not have access to it either, even if you owe taxes.

Furthermore, it’s only federal tax debt that can lead to the seizure of a 401(k). In most cases, you can’t be forced to use your 401(k) to pay any taxes at the local or state level.

Step by Step – IRS Levy on a 401(K)

You don’t need to panic about the IRS taking your 401(k) out of the blue. Before they can garnish a 401(k) for unpaid taxes, there’s a clear process that must be followed. Generally, these are the steps involved:

• You receive a tax bill from the IRS.
• You fail to pay the bill, contest the liability, or arrange a payment plan with the IRS. 
• If the bill goes unpaid for long enough, the IRS will issue a final notice of intent to levy.

By law, the IRS has to give you 30 days to respond to the final notice of levy. This is your last chance to address the tax debt before they move forward with the levy. In certain cases, however, such as the collection being in jeopardy because the IRS thinks you’re going to flee the country, the IRS is entitled to forego the 30-day waiting period.

If you still have not settled your debts after 30 days of receiving your final notice, the IRS will formally proceed with the levy. You will then soon be informed about which assets and properties the IRS has begun seizing. 

If you receive a levy notice, it’s vital that you respond to it as quickly as possible. Even if you can’t pay it, or think that the IRS is mistaken, it’s imperative that you get in touch with them about the bill. Ignoring it will only lead to the seizure of your property.

How to Protect Your 401(K) from an IRS Levy

Protecting your property and assets, including a 401(k), from an IRS levy is all about being proactive. In truth, the only real way to avoid the risk is to stay on top of your tax liabilities, and always respond immediately to any tax bills from the IRS.

Below are some examples of proactive steps you can take to avoid a levy on your 401(k):

• Ensure your income tax return is filed correctly and on time.
• Deal with any notice you receive from the IRS immediately.
• If you have a tax liability, consider enrolling in a repayment program with the IRS in order to avoid a tax lien or levy. You can contact the IRS or a tax attorney for more information to see if this is an option for you. 

Even if you reach the point where you’ve been issued a final notice of intent to levy, there’s still a chance to be proactive and deal with it before the 30-day window passes. But of course, being under that kind of pressure can be challenging, and it can be hard to know where to start.

If you’re feeling swamped by your tax debt and unable to take action yourself, talking to a tax resolution professional can help you get the ball rolling. An experienced tax pro can guide you through the process, streamline your negotiation with the IRS, and help take some of the pressure off. 

Tax Debt Solutions

The IRS offers payment plans to eligible taxpayers who are struggling to pay their tax bills. If you want to avoid having your retirement account seized, you should contact the IRS or talk with a tax attorney about the following options.

Installment Agreement

The first option is known as an Installment Agreement, which allows individuals to pay their tax liability over time in monthly installments. The exact terms will vary depending on how much you owe, your current income, and other details. After paying a small set-up fee, you’ll make low-interest monthly payments to the IRS, and that should keep you safe from the threat of a tax lien.

Currently Non-Collectible Status

In cases of financial hardship, the IRS may also temporarily delay the collection process by designating a Currently Not Collectible status. This can buy you some time until you’re at a point where you can afford to set up an Installment Agreement or pay a settlement. If you cannot afford to pay for years, there is a chance that the debt may expire before the IRS can collect it.

Offer in Compromise

Another possibility is an Offer in Compromise (OIC), which enables eligible taxpayers to settle their debt for less than the full amount owed. To qualify for OIC, individuals must demonstrate financial hardship. When considering OIC applications, the IRS will look at your income, expenses, and assets in order to determine eligibility.

No matter your situation, it’s important to comply with IRS requirements when applying for an IRS payment plan. It’s often smart to consult with a tax professional for guidance, as any wrong steps can result in delayed or rejected proposals, which could cost you more in additional penalties.

Do You Need Help Protecting Your Retirement Savings?

While your 401(k) is safe from the hands of commercial creditors (until you make withdrawals), that sadly isn’t the case with federal tax liabilities. The IRS can legally seize your property, including 401(k) funds, but only if you’ve consistently failed to respond to their notices about your overdue taxes. 

You can protect your retirement funds, and any other assets, by ensuring you get your taxes filed on time each year. And if a tax liability has already got the better of you, know that there are still options on the table. A good tax professional can assess your particular situation and give you a pathway to tax debt resolution. At W Tax Group, we can help you take that all-important first step, and beyond.

Frequently Asked Questions

Can the IRS withdraw money from my 401(k) without notifying me?

No, the IRS cannot withdraw money from your 401(k) without notifying you. There is a legal process that the IRS must follow if they want to collect unpaid taxes from you. The IRS would first issue a notice informing you of the tax debt and its intention to levy your assets, which could potentially include your 401(k).

What should I do if I get a notice of intent to levy?

It’s important that you respond quickly to any notices from the IRS, and consider seeking professional advice if you’re facing significant tax debt. Understanding your rights and exploring available options can help you navigate the situation and potentially avoid a levy on your 401(k).

What are the implications of an IRS levy on my retirement plans?

There are several potential implications on your retirement plans if you were to be issued a levy from the IRS. In addition to losing funds from your 401(k), you could potentially also struggle to make the contributions needed in order to restore your retirement funds. 

It might also mean reduced financial security during your retirement, or it could force you to delay your retirement in order to compensate for the levy.

Are there any circumstances where my 401(k) is safe from the IRS?

Your 401(k) is safe from the IRS as long as you do not carry an outstanding tax liability. If you owe taxes to the IRS and fail to respond to their notices regarding this, then your 401(k) could be garnished.

How can I negotiate with the IRS if I can’t pay my taxes?

If you’re unable to pay your taxes in full, the first step to take is to contact the IRS. If you’ve been issued a notice about your tax bill, that letter will contain the relevant contact information. From there you can explore Installment Agreements, Offer-in-Compromise, or other options that may be available to you.

Get Help Dealing With IRS Back Taxes

At this point, it’s also helpful to seek the help of a tax professional, who can look at the details of your situation and recommend the best way forward. A tax professional can also help you negotiate with the IRS to ensure the best possible outcome. To get help for tax problems now, contact us at the W Tax Group today.