The Contributions Mistake that Can Leave Your Retirement Account Wide Open

1 Jan 2020

The Contributions Mistake that Can Leave Your Retirement Account Wide Open
An IRS Memo Reminds Us the IRS Can Garnish Your Retirement Plan

Because of the multitude of tax advantages that come with self-directed retirement accounts, many self-directed investors believe that their self-directed IRAs and 401(k)s are protected from IRS levies. Unfortunately, an IRS memo reminds us that this is far from accurate.

When you owe the IRS money, the agency can garnish very nearly any asset you own. That includes your retirement plan assets. Do not let anyone tell you that your retirement plan is "IRS proof" because it is highly unlikely that you could be 100-percent bulletproof in this regard.

A 2017 memo from the IRS explains why. In part, it reads:

"Effective on the date of this memorandum, revenue officers may be required to attempt to advise taxpayers that contributions to voluntary retirement plans are not a necessary expense, and that retirement plans may be subject to levy."

The memorandum, IRM 5.15.1.27, goes on to explain that revenue officers should follow a certain process to determine whether or not they should levy a retirement account. This is good news for investors in this situation! The IRS specifically instructs its revenue officers to:

1. Consider other assets available to collect from
2. Determine whether the taxpayer's conduct has been flagrant, and
3. Determine whether the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses.

Items 2 and 3 are particularly relevant for self-directed investors in this situation. Item #2 states that the revenue officer should "determine whether the taxpayer's conduct has been flagrant." That statement follows the direction to "attempt to advise taxpayers that contributions to retirement plans are not a necessary expense."

What does this mean? Well, in a nutshell, if you continue to voluntarily make contributions to an account when the IRS has just told you it does not consider those contributions a necessary expense, that behavior could indicate a flagrant disregard on your part for the IRS's request you pay them money they say you owe. The IRS considers those contributions "flagrant" conduct that can give the IRS the green light to take away the assets in your IRA or 401(k).

What is the lesson here? Don't make those contributions! Do not assume if you can get money into that self-directed account it will be "safe" from levy, garnishment, and collection. Instead, what can happen is that it becomes far less safe than it would have been if you had just left well enough alone while you sorted out your debt to the IRS.

Of course, you should never try to face or fight a hefty tax bill alone. There are steps you can take to try and protect your IRA and 401(k), but you should not attempt any of this one your own. Work with a knowledgeable and experienced attorney who understands self-directed IRAs and 401(k)s and has interacted with the IRS in this area.

by Tim Berry

Tim Berry has spent more than 20 years helping people with self-directed IRAs and self-directed 401(k)s. Learn more at IRAIdeas.com or email Tim at [email protected]

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