New York State Tax

401(K) and Your Tax Bill

A 401(K) is a retirement account that many people have. The question always arises when the need for cash comes up. Many people wonder if they should dip into their 401(K) account for cash to pay for debts or purchases. One common question people ask is whether or not a person should take cash out of a 401(K) in order to pay off back taxes.

Back taxes are often hard to deal with. The IRS may hound a person that owes back taxes, and with the amount of penalties and fees, the amount owed can significantly rise at a steady pace. Many 401(K) plans allow participants to borrow money from the account, but they must repay the money. If a person owes a lot of money in back taxes, borrowing from a 401(K) may be a good option. When this occurs, a person is able to pay all of the taxes owed. This will stop all of the fees, penalty and interest on the tax amount. The person then must repay the money into the retirement account. This should not be done unless a person has no other options however. There are numerous problems that can occur in this type of situation. For example, if a person borrows the money to pay back taxes, and then loses his job, he must repay the total amount borrowed or he will face penalties on the retirement account.

In most cases, the retirement account will be viewed as early withdrawal and will be closed. This amounts to penalties and a loss of money. Another problem is that the amount withdrawn reduces the amount available for retirement. The account will also make less money in interest because the balance is lower.

Anyone who is considering dipping into their 401(K) should seriously consider the consequences of this activity. In some cases, such as to pay back taxes, this actually can benefit a person; but in many other cases, a person could lose a lot of money and suffer huge penalties. A tax advisor can help you determine what is right for you in the situation you are in.

If you need help filing your income tax return or have other questions regarding federal or state tax, you can use these links to find professional bookkeepers, accountants and CPAs in your area.