In 2021, the average 401(k) retirement account had a balance of a hefty $141,542. These retirement accounts are often the accumulation of years of hard work and saving, so it makes sense that you should be aware of everything that could put your account at risk if you currently own a 401(k) account.
One important threat to your 401(k) savings is the IRS if you’ve had tax issues in the past.
We know what you’re thinking — can the IRS take your 401(k)? In short, the answer is yes. The IRS has the authority and power to seize your 401(k) retirement savings if you fall significantly behind on paying off your tax burden.
Learn more about how delinquent taxes could put your 401(k) retirement account at risk and how to navigate these types of collection efforts if you’re facing them below.
Legal Framework Governing IRS Actions
A 401(k) plan is a savings account generally used for a person’s retirement fund. Placing money into a 401(k) offers specific tax advantages and is usually matched by employer contributions.
So, can the government take your 401K? While 401(k) plans do offer some level of protection against creditors, the retirement money isn’t completely safeguarded from the authority of an IRS levy.
The U.S. Constitution gives the IRS the authority to collect taxes. IRS levies are legal seizures conducted by the tax agency to settle a tax debt. Before a levy happens, the IRS secures a lien against the asset. The lien is the legal claim, which provides the agency the authority to take the asset, like your 401(k).
Before your 401(k) is at risk, you will receive several letters from the IRS. First, you’ll be notified about the tax delinquency. You will have time to resolve your situation, pay off what you owe, or get in touch with the IRS about other possible solutions to your tax problems. If you do not settle the issue, then you will receive another tax notice in the mail.
If you don’t respond to these notices, then the IRS might pursue more collection efforts, including potentially levying your 401(k) account. You should receive a notice of intent to levy directly from the IRS before your funds are at risk.
Circumstances Under Which the IRS Can Access Your 401(K)
Facing a tax levy should never come as a surprise to a taxpayer. The IRS will only be able to access your 401(k) funds in a few different circumstances. Under the most common circumstance, you owe the IRS a tax debt and don’t respond to the agency’s multiple attempts to notify you and collect a payment. You will receive several bills and a notice of an intent to levy your 401(k) account. When you do not make an effort to stop this collection effort, the IRS has the authority to withdraw funds to resolve the tax debt.
Another circumstance when the IRS can access your 401(k) funds is when you currently have a wage garnishment in place and are receiving 401(k) distributions as a form of income. Can your 401k be garnished in these circumstances? In short, the answer is yes; your 401(k) funds will be considered income, which means they can be garnished just like your paycheck.
The Process of an IRS Levy on a 401(k)
An IRS levy on your 401(k) or a wage garnishment will both result from unpaid or unfiled taxes. After you fail to file or pay, the IRS will send you a notice regarding the delinquency. After a period of time, they’ll send a bill. If you disregard communications, things will eventually progress to the point where the IRS files a levy. You will get a notification regarding the intent to levy your 401(k), and you’ll be given the chance to prevent it if you respond in a timely manner.
Note that the funds seized from your 401(k) are considered to be a withdrawal. At the end of the year, your 401(k) administrator will send you a form detailing how much was withdrawn, and you will be required to report those funds as income. That will generally create additional tax debt. Luckily, however, you don’t incur the 10% early withdrawal penalty when the withdrawal is due to an IRS levy.
Protecting Your 401(k) from IRS Levies
If you currently own a 401(k) account, then you may want to know how you can proactively protect your retirement money from the IRS. One of the top ways to protect your 401(k) is to stay current with your tax returns and pay off your tax obligations. If you do fall behind for some reason or run into another type of tax issue, then simply stay in touch with the IRS. Consider consulting a tax attorney could be beneficial, as they are experts in the field and well-versed in all the available options and remedies for your situation.
Communication is key. If you address tax issues promptly, your situation should never progress to the point where your 401(k) is at risk, even if you owe a hefty amount. If you have more questions about how to secure your retirement account, consider consulting with a tax professional for help.
Alternatives and Solutions for Tax Debts
The number one way to stop IRS collection efforts is to settle your tax debt in full. When possible, the best option is to simply make a massive lump sum payment that covers your entire tax bill, fees, penalties, and accumulated interest.
This option isn’t always possible, though. If you can’t pay off your debt in full, your next best option is to negotiate with the IRS and agree to a payment plan. Payment plans typically allow you to pay off your tax debt in monthly installments over a long period. While you make your payments, the IRS will agree not to continue to pursue collection efforts against you, like taking money from your 401(k).
During the negotiation process, you’ll want to consider whether you’re eligible for any type of penalty abatement, reduction in your overall tax burden, or another type of tax relief. If you’re unsure, consider speaking with a tax professional who will advocate for your best interests throughout the negotiations.
Are you genuinely unable to pay off your tax burden? Would submitting to a payment plan cause financial hardship for you and your family? If so, then it might be possible to stop IRS collection efforts by proving to the IRS that you can’t pay. With the proper documentation, the IRS will agree to mark your account as currently not collectible and stop collection efforts unless your financial situation improves in the future.
Remember, you can nearly always negotiate with the IRS. The tax agency wants to collect on the debt, but they are also incentivized to work with you since pursuing collections is time-consuming and costly. You have rights throughout the process, too, including the right to hire a tax lawyer to support you during the process.
FAQs: Taxes and Your 401(k)
Do you have more questions about your tax obligations, your 401(k), or your tax delinquency? Are you still wondering if the IRS takes your 401(k) with or without your consent? In many cases, it’s best to ask your tax questions directly to a tax resolution attorney. The right lawyer will take into account your specific financial situation, the facts surrounding your tax delinquency, and the law in the state you reside in. That said, we’ll provide some broad answers to some of the most frequently asked questions below.
Can the IRS Withdraw Money from my 401(k) Without Notifying Me?
No. The IRS will never withdraw money from your 401(k) without attempting to notify you first. The IRS is legally obligated to follow a specific collections process, which includes notifying you about your delinquency and providing you with ample time to resolve your tax situation.
If you do not respond to their notices about your tax debt, the IRS will only move forward with a tax levy or other collection efforts. You should receive at least two tax bills before collection actions are initiated. The only exception is for a jeopardy levy.
What are the Implications of an IRS Levy on my Retirement Plans?
When the IRS levies your retirement money, your entire retirement plans can easily get derailed depending on the level of your tax delinquency. Keep in mind that the tax agency can seize the 401(k) money, whether it’s being distributed as income or sitting in an account.
Are There Any Circumstances Where my 401(k) is Completely Safe From the IRS?
The only circumstance where your 401(k) is completely safe from the IRS is when you’re up to date on filing and paying your taxes. Your 401(k) could be at risk if you’re behind on your taxes and you’re not communicating with the IRS about resolving the situation. Your 401(k) isn’t necessarily safe regardless of whether you’re getting withdrawals as income or it’s sitting in an account. You may also be wondering if I cash out my 401(k) can it be garnished? The answer is yes.
How Can I Negotiate with the IRS if I Can’t Pay My Taxes?
If you can’t pay your taxes, then you should collect the documentation necessary to prove your financial situation. This evidence will help you create a strong position to negotiate from. Once the IRS evaluates your ability to pay, they’ll be more likely to work with you to create a plan that fits your needs.
What are the Long-Term Effects of an IRS Levy on my 401(k)?
An IRS levy could put your future plans at risk, cause you to lose some of your retirement income, create problems when it comes to taking out new loans, and increase your overall debt-to-income ratio. So long as you still have a remaining debt on your account, the IRS will continue to attempt various collection efforts.
What are my Rights When I’m Facing IRS Collection Efforts?
All taxpayers have a specific set of rights, especially if they’re facing collection efforts from the IRS. In general, you have the right to:
- Be Informed
- Receive Quality Service
- Pay No More than the Correct Amount of Tax (plus penalties and fees)
- Challenge the IRS and Be Reasonably Heard
- Appeal an IRS Decision in an Independent Forum
- Finality
- Privacy
- Confidentiality
- Hire Legal Representation
- Experience a Fair and Just Tax System
If you feel you’re being treated unjustly and your rights have been violated, then it might make the most sense to contact a tax lawyer in your area. The right tax advocate will seek to understand your situation entirely before recommending a course of action to resolve the breach of your rights. What’s more, the right tax attorney should also be able to help you find a reasonable solution to your tax problems.
Do I Need to Speak With a Tax Professional?
You are never obligated to speak with a tax professional to resolve a tax situation since you are welcome to work out your issues directly with the IRS one-on-one. That said, it’s usually a good idea to speak with a tax professional when:
- You’re facing severe collection efforts like wage garnishment or asset seizure
- You are getting charged with a tax-related crime
- You aren’t sure what your rights, responsibilities, or legal options are when it comes to paying your taxes
- You need help navigating your taxpayer obligations
- You want to make sure your rights are upheld as you resolve your tax problems
Are You Ready to Talk to a Tax Resolution Attorney About Your Situation?
Have you recently received a notice in the mail from the IRS regarding a potential levy on your account? If you currently own a 401(k), then a tax levy does put your retirement money at risk. Your 401(k) may not be the only thing you’re concerned about since a tax levy can also impact your bank accounts, Social Security benefits, current wages, homes you own, vehicles in your name, and any other assets you have.
The good news is that no matter how delinquent your account has become, there is almost always a way to resolve your tax situation.
In most situations, the IRS will work with you to develop an agreement that benefits both parties. It makes the most sense to hire a tax attorney to be your best legal advocate to ensure that your legal rights and interests are upheld throughout the negotiation process. The right tax resolution lawyer will ensure that the IRS agrees to a plan that you can financially handle but that will also keep your 401(k) safe from seizure. So long as you maintain your end of the agreement, your retirement income should be safe.
Our team of expert tax attorneys are ready to talk to you one-on-one about how to resolve your tax situation. Call us at (404) 233-9800 or fill out our online consultation form today.