Why Using Retirement Funds to Pay the IRS Can Backfire
It looks like the responsible thing to do.
Your client gets an IRS notice. They have enough money in their retirement account. withdraw the money. They pay it off. Problem solved.
Nope.
A CP2000 comes in the mail showing an additional assessment or a CP14 with a balance due notice. The number isn't huge but it's not something they can pay out of pocket. And because they're freaked out, they decide to "just pay it" by liquidating part of a 401(k) or IRA.
It might seem like a good decision but it may actually create a new tax problem.
1. Retirement Withdrawals Are Income
When someone pulls money from a traditional IRA or 401(k), the IRS treats it as ordinary income.
The withdrawal stacks up on top of everything else, including pension income, social security and required minimum distributions.
A $25,000 withdrawal isn’t just $25,000. A larger distribution increases Adjusted Gross Income (AGI) which can trigger:
Higher marginal tax brackets, increasing the rate on the top portion of income
IRMAA surcharges, which increase Medicare Part B and Part D premiums based on income reported two years prior
Phaseouts of deductions or credits, depending on the taxpayer’s profile. and, more importantly, provisional income, which is used to determine how much of Social Security becomes taxable.
2. When Using Retirement This Year Creates a Problem Next Year
Here’s what this looks like in practice:
Year 1: Client owes $20,000 → withdraws $25,000 → pays IRS
Year 2: Tax return reflects increased income → new tax liability appears
They are put in the same situation again. Withdraw more… or figure out another option.
3. The Real Cost Isn’t Just Taxes—It’s Lost Time
Every dollar withdrawn from a retirement account is no longer compounding.
That $25,000 isn’t just $25,000. It’s what that money could have become over the next 10–20 years.
A $25,000 withdrawal from a retirement account earning a conservative 5–6% annually:
Over 10 years → ~$40,000–$45,000
Over 15 years → ~$52,000–$60,000
That’s the actual long-term cost of solving a tax problem inefficiently.
TL;DR
Using retirement funds to pay an IRS balance can:
Increase AGI and provisional income
⏩ Cause more Social Security to become taxable
⏩ Trigger higher Medicare premiums (IRMAA)
⏩ Create a new balance due the following year
⏩ Permanently reduce long-term account value
It solves the immediate problem—but may create a second one.
➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.
Contact Me Here: https://www.weisberg.tax/contact-1
Email: s.weisberg@weisberg.tax
Phone/Text: (248) 971-0885
Address: 300 Galleria Officentre, Suite 402, Southfield, MI 48034
