Should You Take Money From Your 401(k) to Pay Back Taxes

I would be very reluctant to take money from a 401(k) plan prematurely for any reason. It took years to accumulate that money by having it taken from your check one pay period at a time. You need that money for retirement. Unless you qualify for a specific exception, you will have to pay a 10% early withdrawal penalty. You will also have to claim the withdrawals as income this year and pay income tax on them.Sadly, many people don't realize how the withdrawals will affect their taxes when they take out the money. They withdraw $60,000, spend it, and then realize the following year when they file their taxes that they owe $20,000 or so. How will they pay that?

One great thing about having your money in a retirement account is that it's practically untouchable. When people get too far behind in their taxes, the IRS can empty a regular bank account unannounced. Real estate can have liens attached by creditors. Retirement accounts, on the other hand, are almost impossible for creditors or the IRS to get a hold of.

When you no longer work for an employer, you should move your money out of the company 401(k) plan and into an IRA or other retirement account. Some people end up with multiple retirement plans from all the places they've worked. It's hard to even keep track of them all! An IRA gives you more investing options, and you can contribute to it every year. Contact the new plan’s administrator and ask them how to do a "rollover." Make sure it's a direct rollover to avoid tax complications.

If your tax problems are severe, you should hire a good tax attorney. Yes, tax attorneys are very expensive, but this is a serious problem. Without an expert looking out for your husband's interests, things could get worse. With help, however, you have several options to choose from, including setting up an installment plan, making an Offer in Compromise (OIC), or challenging the amount of taxes owed. Tax problems are enormously stressful. They only get worse when they drag on and on. Take action now to solve these problems.

I've heard too many times about people taking money out of retirement funds, or even "borrowing" it, and then it's gone. The closer you get to retirement age, the harder it is to make up for that loss. Do yourself a favor, and keep your retirement money for retirement!
If you would like to learn more about how to deal with your IRS debt, go to http://www.taxdebtbook.com.