Owe with return - not 59 1/2 until April 22

[KJ Judd]

Taxpayer owes several thousand each to federal & state. He's planning on withdrawing from his IRA to pay. I've recommended waiting until he turns 59 1/2 to avoid penalty (part of his thousands he owes this year).

The .5% late payment penalty is less than the 10% early IRA withdrawal penalty. Is there any way to have him avoid interest & penalties completely since he'll only be paying a week or so late? I didn't see any, but I'm definitely fuzzy brained by now.

[veritas]

Pulling money from retirement.

What is the interest rate if for example 15% plus 10% goes to pay federal tax and early withdrawal penalty?

Let's say he takes out $10,000 X .25% = $2500. 2500/10000=250% interest rate.

How about a car title loan instead?

[Lion]

Any other options?

Any other options? Borrow from his 401(k)? Home Equity loan? Cash withdrawal from credit card? Relatives? Can stave off collections with temporary (120 days) extension to pay, but interest and penalties still apply -- application is on IRS site along with installment agreement which would lower interest rate but charge a set-up fee.

[JohnH]

You're understating the actual cost since it's greater than .5%, but nevertheless I think your client is swatting at gnats. He may also have some small additional estimated tax penalty due, depending upon the overall return. (I only mention this because you don't want ot find ourself in the postion of explaining why he owes more than you estimated when the bill arrives)

He will pay about 1.25% in FTP penalty and interest per month, whereas he will take a 10% penalty for the early withdrawal. It's really as simpile as that. He just needs to make a smart choice here, which seems to be to file the return without payment and the pay up when he can make the withdrawal.

Depending upon the actual amount, he might be able to minimize the effective interest rate slightly by taking a low-rate or no-rate short-term credit card advance, but those transactions have up front fees associated with them. I think they run about 3%, which would be the equivalent of 2-1/2 month's FTP penalty plus interest. Since he can get out of this by only paying one month's FTP penalty plus interest, that's not a good move.

It's funny - people can be really smart investors and then do some of the goofiest things just because taxes are involved. Tax obligations are just another liability, to be managed in the most efficient manner from a financial point of view. Money has a time value, and he's wasting your time & his trying to figure out how to use somebody else's money for free.

[Brian EA]

Exception to the Penalty

One of the exception to the penalty is taking money from the retirement plan to pay the IRS

brian

[JohnH]

I thought that exception only applied if there is a levy. A voluntary withdrawal wouldn't qualify would it?

[taxation.guide]

Hi,

I completely agree with John's perspective on this topic. Curious to know more about other's view.

[DaveO]

Credit card loan

Would be my first choice if he is not already maxed out. My card caps fees at $60. If he can re-deposit what he withdraws from the IRA within 60 days that would be better. The IRS must levy to avoid the 10% penalty from an IRA.

[joanmcq]

Actually, the IRA must be levied to avoid a penalty. The withdrawal cannot be to pay another levy or avoid a levy.

[ED SMITH]

There is a little known and hardly used Late Payment Form - 1127. Check it out.

[S T]

Form 1127

Ed Thanks for the info, doesn't look like you could use it very often, due to the restrictions, but valuable information

For anyone that wants to take a look here is the link http://www.irs.gov/pub/irs-pdf/f1127.pdf

Sandy

[JohnH]

I read it, but I don't see how it helps or hurts the taxpayer. A phone call to IRS will usually get them 3-4 months, and an Installment Agreement will help beyond that point. Looks like FTP penalties & interest apply either way, so the 1127 doesn't appear to accomplish anythong other than make the taxpayer & preparer feel better in some way.