Good afternoon.

Long story short. I am trying to clean up my credit, and resolve back taxes with the IRS. The interest and fees now higher than my tax debt.

I do have a tax attorney that is working with me and the IRS. I want to pay the IRS asap once I know the amount, about $12,000. The IRS is willing to take $250.00 per month. I am fine with that, but it will take me forever to pay it off.

I have 2 401k accounts. 1 is with ML, $20,799.63... $9,983.55 of which includes a general purchase loan I am paying on though my employer though I no longer contribute, because we are a "new company" now and my company has a different 401k and I contribute to that one now which is about $18,000.

My question:

Can I close the ML account and use the money to pay my back taxes, or at least most of the debt paid so that my monthly payments get paid much much sooner. According to the IRS guidelines and other sites I have looked at, this is not a hardship. I would like to close (liquidate) the account completely. I may be wrong, but the penalties are far less than the IRS interest and penalties that are accruing, but I can't find any information on if this is even possible.

I do not want any changes to my current 401k.

Does anyone have advise?

First, your tax attorney should be pushing HARD to have the IRS waive the penalties (they cannot by law waiver the interest charges). If he is successful, then you LEAVE the 401K alone!

Once you have set up the payment plan, you will pay it off in about 4-5 years, just like a credit card. Assuming you adjust your withholding properly to be sure you get a small refund at the end of each year (note that the refund WILL be confiscated to pay on your tax debt), you will be okay with the IRS in about five years. The interest that the IRS currently charges is a LOT less than most credit cards.

The reason I am pushing the payment plan ONLY is due to the HEAVY penalties you pay when you cash in ANY 401K or traditional IRA.

First, you must pay federal AND state taxes at your marginal rate, which is probably about 25%. If you live in a high tax state like MA, NY or CA, you can add 10% to the 25% for a total of 35%.

Second, you also pay a 10% Early Withdrawal Penalty ON TOP of the taxes.

So, in total, you would be looking at a end-of-year tax bill on the distribution that will probably be about 45% of the total distribution. Since the 401K custodian only withholds about 20%, you would then need to come up with ANOTHER 25% come tax time, which probably means entering into ANOTHER payment plan with either the IRS, your state tax department, or BOTH. I do NOT think that is what you had in mind.

So, Bottom Line, LEAVE YOUR 401K ALONE!