The Internal Revenue Service is among the most resourceful, determined and powerful collection agencies in the world. Congress has delegated broad authority to the IRS to enforce the U.S. Tax Code, including the ability to place liens on and outright levy property and financial accounts. The lien and levy authority extends to most kinds of retirement accounts.
The IRS ability to seize assets and property is restricted by U.S. Code Section 6334, Property Exempt from Levy. Specifically, the law prohibits the IRS from seizing certain kinds of assets, including clothing, schoolbooks, books and tools of a trade up to $3,125 in value, unemployment benefits, certain annuity and pension payments, workers' compensation payments, judgements for child support, a basic wage or salary equivalent to the standard deduction and exemptions in the tax code, certain disability payments for veterans, certain welfare payments, and residential real estate if the IRS debt is less than $5,000.
Exemptions for Annuities and Pension Payments
The federal law cited above protects pension payments under the Railroad Retirement Act, the Railroad Unemployment Insurance Act, the retirement pay of recipients of the Medal of Honor and certain kinds of annuities. No exemption is made, however, for retirement accounts such as IRAs, 401ks and other retirement assets. If you hold the asset in your own name, your retirement accounts are subject to levy.
Technically, assets in 401k and other plans governed by the Employee Retirement Income Security Act, also called "ERISA-qualified" plans, or "qualified plans" belong to the plans, not to you. Many plans contain "anti-alienation" clauses or provisions that prohibit plan trustees from transferring any benefits to any third party for any reason. Some workplace plans prohibit employees from taking distributions on their 401k plans while still in service with the company. If your 401k plan prohibits in-service distributions, the workplace plan may choose to refuse to honor the IRS levy. In this case, any funds that eventually become eligible for distribution may be subject to the levy. If your plan allows for early retirement, or distribution for any other reason, the IRS can make the decision to distribute in your place, and seize the distributed assets. However, the IRS cannot make a decision for your spouse. This means that they cannot take more out of the 401k than an amount equal to what your payout would be had you elected a "joint-and-survivor" payout option, where income payments would last as long as either you or your spouse remained alive.
Levys and IRAs
The IRS may place a levy to seize IRAs. It is much easier for them to do this, because the ownership of assets in IRAs is clear. IRA documents do not have "anti-alienation" provisions. You are the sole owner of the asset in the plan, and IRA assets are subject to levy by the IRS. However, the IRS will typically not seize more assets in retirement accounts than would be necessary to bring a taxpayer's income to the minimum income exempt under Section 6334.
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