Use retirement funds to pay off LARGE IRS bill?

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LifeBeyondTheSalary
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Joined: Mon Jun 10, 2024 7:30 pm

Use retirement funds to pay off LARGE IRS bill?

Post by LifeBeyondTheSalary »

I know, I know, I KNOW we aren’t supposed to do this because of the tax hit but we have multiple years of IRS debt (& finances just have not recovered like they were a few years ago) & it doesn’t seem like we’re making much headway even trying to pay it off monthly. How horrible would the hit come on next year’s tax bill if we took some (not even 1/2) out of the (inherited) Roth IRA that has been converted to me years ago. Not sure if that makes sense. Will be hopefully getting to talk to our financial advisor this week or next but should we even look at this as an option? I’m a SAHM & we homeschool, but thankfully both of us do have multiple streams of income. We have farm land but at least 3 of those streams of income that are connected to the plots of land & not willing to sell them as they have been passed down through the generations (my great grandparents+) ~we’re in our late 40’s. Has anyone done this & if so, just how bad was the tax hit? Thank you to any who comment.
bongo
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by bongo »

LifeBeyondTheSalary wrote: Mon Jun 10, 2024 8:42 pm How horrible would the hit come on next year’s tax bill if we took some (not even 1/2) out of the (inherited) Roth IRA that has been converted to me years ago. Not sure if that makes sense.
Zero. There are no taxes on a Roth. Depending on when you inherited it, you would have to empty it either in 5 yrs, 10 yrs, or over your lifetime, so you do lose some tax-free growth.
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mhadden1
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by mhadden1 »

LifeBeyondTheSalary wrote: Mon Jun 10, 2024 8:42 pm How horrible would the hit come on next year’s tax bill if we took some (not even 1/2) out of the (inherited) Roth IRA that has been converted to me years ago.
I don't think withdrawals from a Roth are ordinarily taxable. When did you inherit the Roth and from whom? Are you subject to rules for the Roth IRA that you inherited, that require certain withdrawals? I am not an expert on all flavors of inherited Roths, just trying to understand your circumstances.
Retired 12/31/2015, age 58 years 77 days (but who's counting?)
MadHungarian
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by MadHungarian »

If it's your own funded Roth, you can withdraw your contributions tax free at any time, but withdrawal of any earnings are subject to taxes and possibly penalties.
If it's a Roth converted by you from a Traditional IRA, then i'm not sure what the early withdrawal rules are.
If it's an inherited Roth, (like it sounds like?), then you can withdraw everything tax-free at any time, as others mentioned. And again like others mentioned, depending on when exactly you inherited it you might be required to withdraw everything within 10 years anyway. If i remember correctly, IRA's inherited after 2019 must be emptied within 10 years. Those inherited earlier only must be emptied within the lifetime of the beneficiary.
(Note that there's also a 5-year rule for certain cases and some other fine print that i'm not familiar with, depending on the relationship of deceased, etc)

I'm assuming that IRS interest+penalties probably increase faster than investment returns usually do, so i'm guessing it's probably a good idea to pay off the Infernal Revenue Service as soon as possible. Caesar always wants his cut.
bongo
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by bongo »

Just in case, there actually is a very unlikely case where tax would be owed: if the person who died and left you the Roth had just recently opened and funded their very first Roth, then if you take out earnings before 5 years have passed from Jan 1 of that year, then the earnings do get taxed.

Eg. someone opens their very first Roth in 2020 and does a 100k Roth conversion. They die and you inherit the Roth, and today it has now tripled to 300k. If you take out 150k before 1/1/2025, then the first 100k is tax free, but the additional 50k is taxed.
Alan S.
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by Alan S. »

If there were earnings distributed from the inherited Roth that were taxable, there would be no 10% penalty due to the inherited status.

However, if a taxable distribution was taken from an owned TIRA or Roth IRA, the 10% penalty would apply to the taxable portion. Note that if the IRS ever places a lien on an IRA, the penalty is waived.
HomeStretch
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by HomeStretch »

Without a Roth IRA distribution, how long will it take you to pay off this tax bill?

If you pay off the tax bill with a Roth IRA distribution, are you able to pay your living expenses, taxes and add any $ to savings with your current income? If the answer is yes, consider paying the tax bill off just for the peace of mind it will likely bring.
Makefile
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Re: Use retirement funds to pay off LARGE IRS bill?

Post by Makefile »

HomeStretch wrote: Tue Jun 11, 2024 5:57 pm Without a Roth IRA distribution, how long will it take you to pay off this taxbill?

If you pay off the tax bill with a Roth IRA distribution, are you able to pay your living expenses, taxes and add any $ to savings with your current income? If the answer is yes, consider paying the tax bill off just for the peace of mind it will likely bring.
The OP hasn't mentioned how far into the collections process the bill is. Can't the IRS dip into your retirement accounts to collect a tax debt? And in that case, isn't an inherited Roth the best case scenario as the source of funds, as opposed to letting the IRS pick?
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