Can the U.S. Government Take Your 401(K)?

If you’re in debt, chances are you’ve thought about if the government can take your 401(k) retirement money. People work hard to invest their money in retirement accounts to ensure security for the future. According to the current legislation, there’s little chance that the government can take your 401(k) account, but this is not 100% guaranteed, and there are cases that won’t stop a government 401(k) confiscation.

If you still feel uneasy about a possible government takeover of your 401(k), read on to find out how and when this can happen.


How Safe Is Your 401(k)?

401(k) plans are generally safe as they are protected by the Employee Retirement Income Security Act (ERISA). ERISA is government legislation that protects 401(k) assets from takeover by commercial creditors in the event of civil procedures, such as bankruptcy or lawsuits. However, the Act may not have the same level of protection when it comes to the federal government.

ERISA doesn’t apply when you owe money to the government in the form of taxes or fines. In these cases, the federal government can take money from your 401(k) account through the IRS. The same principle applies if you’ve been convicted of a crime or have a court judgment to pay child support and alimony.

Generally, 401(k) plans are safer than other IRA accounts from state authorities. 401(k) plans are usually sponsored by employers, while an IRA account is typically opened by an individual without the employer’s involvement. IRA account protections vary by state. All the states have self-directed IRA protections except for Wyoming.


What to Do to Prepare for Retirement

It is never too early to start preparing for retirement. The earlier you start investing in a retirement plan, the more likely you are to have a sizable chunk of change when you retire.

A 401(k) is sponsored by your employer, and they typically match your contributions up to a point. Conversely, an IRA account is a personal retirement plan that your employer does not contribute to. Both of these retirement accounts offer some tax benefits. Some of the benefits of a 401(k) include

  • A $19,500 annual employee contribution limit compared to $6,000 for IRA accounts
  • A $6,500 additional catch-up contribution for those age 50 and older compared to $1,000 for IRA accounts
  • No contribution limits for 401(k) accounts as long as it does not exceed the employee’s wages.
  • Depending on your employer’s plan, 401(k) accounts typically offer contribution matching. IRA accounts do not provide employer matching

As already mentioned above, try to go with a 401(k) account if you’re worried about government seizure of your retirement accounts. Typically, 401(K) accounts are protected by ERISA, whereas IRA accounts are not.

How to Protect Your Retirement

Many people are intrigued by the idea of moving their retirement assets to offshore locations to avoid seizure by creditors or the government. However, the IRS can still seize your retirement money through tax treaties with multiple countries in the world.

Instead of taking time-consuming and costly measures to protect your retirement assets, try to go for reliable and time-tested options. One of the best protection strategies is to add gold to your retirement account.

Many individuals opt to invest all or a portion of their retirement savings in physical assets, such as gold. This is because gold is usually less vulnerable to market volatility and fluctuations.

As a result, you may choose to rollover your retirement account into a gold IRA. For example, you can use your 401(k) funds to purchase IRS-approved physical gold bars and coins. With a gold IRA account, you can still retain your ERISA protections. In addition, you will be exempt from taxation until you decide to distribute the funds.

Once you decide to liquidate your account, you can choose to withdraw funds in cash or physical gold. Typically, it is more difficult for the government to garnish your account if the assets are physical gold. As a result, many individuals choose to withdraw physical gold from their accounts rather than cash.


The Basis Given for a Takeover of Retirement Plans

If the IRS decides to take over your 401(k), it may be due to one of the following reasons:

  1. You have not paid your federal taxes. If you have outstanding taxes, the government can place a levy on your property and confiscate your belongings. A tax levy allows the federal government to seize your assets, including your retirement account. So, your 401(k) can be garnished too. Keep in mind that only the federal government can take your 401(k) money for such purposes, and local authorities do not have this power.
  1. You have committed a federal crime and are ordered to pay penalties. In some instances, the government can take your 401(k) and confiscate your retirement money if you have committed a federal crime and have to pay fines or penalties. Moreover, the IRS can order you to terminate your plan if you have mishandled it or committed fraud. 
  1. You have failed to pay alimony and child support. The government can garnish your 401(k) account if you have unpaid child support or alimony. Following a court order, the authorities have the right to withdraw funds from your retirement plan to pay for due allowances. During a divorce, your spouse can even become a co-owner of your retirement plan. As a result, the court can also allocate your 401(k) funds to your spouse if you fail to comply with family obligations.

How Much Will the Government Take from My 401K?

Determining how much the government will take depends on the type of 401(k) account you have. There are two different types depending on the taxes you pay:

  • Pay taxes on your 401(k) as the money enters the account: Roth 401(k)
  • Wait and pay the taxes at disbursement: traditional 401(k)

Funds in a Roth account are after taxes, meaning it is taxed before being deposited into the account. Additionally, Roth accounts have limits on what type of income and how much money can be invested. Conversely, a traditional account is taxed upon withdrawal. As a result, you will be taxed based on your income bracket at the time of withdrawal.

Early Withdrawal Penalties

Sometimes, depositors may be forced to pay penalties if they withdraw funds from their retirement accounts earlier than the maturity date. If applicable, you can use an early distribution costs calculator to figure out how much extra you owe Uncle Sam. Factors that affect how much the government will take may include:

  • Your federal income tax rate
  • Your state income tax rate
  • Whether you’re over 55 years of age
  • How much do you plan on taking out
  • How far you are from your planned retirement
  • Your estimated rate of return for your 401(k)

You may be able to avoid some of these penalties thanks to the Covid relief bill that passed in 2020. It’s worth speaking with a tax professional to see if you qualify for taking out up to $100,000 from your 401(k) without paying a 10% fee.


Other Ways the Government Restricts My Private Retirement Plan

The U.S. government controls how much you can contribute to your retirement plan. Your contribution limits are based on three factors:

  • Salary-deferral contributions: the amount you invest from your yearly salary
  • Catch-up contributions: the additional amount you can pay if you are aged 50 and older
  • Employer contributions: the amount your work contributes to the plan

In 2021, the IRS increased the salary-deferral contribution limit to $20,500 per year. If you’re 50 or older, you can also invest a maximum of $6,500 catch-up contribution per year from other sources. As of 2022, your personal and employer contributions are capped at:

  • $61,000 annually for individuals under 49
  • $67,500 annually for individuals 50 and older.

Conclusion

To sum up, the federal government can seize your 401(k) plan only in extreme circumstances. For example, if you have unpaid federal taxes, fines, penalties, or child support, the government may turn to your retirement plan to cover these outstanding payments. The U.S. government may also seize or garnish your account if you’ve committed fraud.

Posted on May 18, 2022 by James Miller

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