Can I Pay the IRS From My 401(k)?

Distribution Rules

If you are struggling to pay a tax bill and savings in a 401(k) are your only option, you might consider tapping the account for an early distribution. Because you originally made these contributions pre-tax, you must claim them as income when you withdraw them. This will increase your taxable income and your final tax bill. If you take a distribution from your 401(k) to pay for taxes and you're less than 59½ years old, you will pay an additional 10 percent tax on the amount withdrawn.

The IRS allows you to submit a Form W-4 or a Form W-4P to the administrator of your 401(k) fund to set your withholding allowances. When you submit this form, the administrator treats your distributions similarly to a paycheck, withholding income taxes from your payment similar to payroll withholding. Contributions to your 401(k) are included in the tax basis for your Social Security, Medicare and federal unemployment tax in the year in which you earn them, so the administrator does not withhold those taxes from distributions.

The IRS allows you to take distributions from a 401(k) without incurring the 10 percent tax penalty in cases of financial hardship, but tax burdens don't meet the requirements for hardship. To qualify as a hardship distribution, you must use the funds for qualifying medical expenses, purchase of a first home, tuition or educational expenses, burial costs, home repairs, or to avoid eviction from or foreclosure on a principal residence. You must also have no other assets available to meet your financial hardship.

If you are retired and receiving normal distributions from your 401(k), you must take a regular distribution if you wish to pay your taxes using the account. The IRS offers a free way to transfer funds directly to it -- the Electronic Federal Tax Payment System, or EFTPS. You may only transfer funds to the IRS from a checking or savings account. Your 401(k), home equity lines of credit and IRAs aren't accessible by the system, so you will pay income tax on the amount withdrawn to pay the IRS.