The best way to protect your retirement funds from the IRS is to avoid a tax lien. If you have a back tax debt, contact the IRS to work out an installment plan as soon as possible. As long as you keep your payments current, your 401(k) funds are likely safe from IRS seizure.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
The IRS can legally garnish your pension, 401(k), or other retirement account to pay off any back taxes you might owe. In most cases, the IRS treats this garnishment as a last resort. It is difficult to get access to these funds, as the accounts are often restricted by limitations and requirements.
The IRS can legally levy your 401(k) and other retirement accounts, including self-employed retirement plans. Although these accounts may be protected from creditors, the IRS can legally seize funds from your retirement savings to recover back taxes you owe.
Though a less common reason than overdue taxes, the federal government can also potentially seize or garnish your 401(k) if you have committed a federal crime and are ordered to pay fines or penalties.
If you want more control over what's in your retirement account consider opening a traditional IRA or Roth IRA. These accounts offer tax benefits but also allow you more choice as to what you're invested in, including individual stocks, bonds, mutual funds, index funds and ETFs.
The Bottom Line
Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. But doing so could potentially cost you growth in your portfolio over time.
Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky.
Deposits held in 401(k) plans are covered if the assets in question are held by an FDIC-insured financial institution. The FDIC insures deposits up to $250,000—such as checking, money market, and savings accounts.
If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.
After you become 59 ½ years old, you can take your money out without needing to pay an early withdrawal penalty. You can choose a traditional or a Roth 401(k) plan. Traditional 401(k)s offer tax-deferred savings, but you'll still have to pay taxes when you take the money out.
Your 401(k) is invested in stocks, meaning your account's value can go up or down depending on the market. If the market dropped, you could lose money in your 401(k). This is why it's essential to diversify your investments and not put all your eggs in one basket.
In the longer term, the economic collapse would likely cause many firms to file bankruptcy in which case your 401(k) shares would essentially become worthless.
No investment is entirely safe, but there are five (bank savings accounts, CDs, Treasury securities, money market accounts, and fixed annuities) which are considered the safest investments you can own. Bank savings accounts and CDs are typically FDIC-insured. Treasury securities are government-backed notes.
Add a volatile stock market to the mix and those saving for retirement may start rethinking their investment plans. Yet investing in equities is the best hedge against inflation, said Tom Henske, a New York-based certified financial planner.
Taxes will be withheld. The IRS generally requires automatic withholding of 20% of a 401(k) early withdrawal for taxes. So if you withdraw the $10,000 in your 401(k) at age 40, you may get only about $8,000.
Did you know the government owns a piece of your traditional 401(k) or IRA? Here's how to get it back. While you end up paying taxes on your retirement savings one way or another, you have at least partial control over how much you pay and when that happens.
Lets get one thing out of the way first: unless you have an IRS levy or other legal judgment against you, the US Government has no legal standing to seize the contents of your private retirement account, such as your 401k, IRA, Thrift Savings Plan, your self-employed retirement plan, or any other retirement plan.
The Fresh Start Initiative Program provides tax relief to select taxpayers who owe money to the IRS. It is a response by the Federal Government to the predatory practices of the IRS, who use compound interest and financial penalties to punish taxpayers with outstanding tax debt.
By age 50, retirement-plan provider Fidelity recommends having at least six times your salary in savings in order to retire comfortably at age 67. By age 55, it recommends having seven times your salary.
If you filed on time but didn't pay all or some of the taxes you owe by the deadline, you could face interest on the unpaid amount and a failure-to-pay penalty. The failure-to-pay penalty is equal to one half of one percent per month or part of a month, up to a maximum of 25 percent, of the amount still owed.
Tax on a 401k Withdrawal after 65 Varies
Whatever you take out of your 401k account is taxable income, just as a regular paycheck would be; when you contributed to the 401k, your contributions were pre-tax, and so you are taxed on withdrawals.