If you owe the Internal Revenue Service for overdue federal income taxes, the IRS can garnish your assets to get payment. This procedure is called a levy. When the IRS levies against your assets, it may go after any funds in your retirement account, or any retirement payments you receive. Some regulations restrict the amount the IRS can levy against; other rules specify when the IRS can collect the funds.
What the IRS Can Levy
The IRS has broad authority to take any types of retirement assets, whether current payments or retirement savings accounts. The agency can levy against Social Security, military, civil service and railroad retirement benefits. It also can tap retirement accounts that are employee- or self-sponsored. This includes qualified pension plans under ERISA, individual retirement accounts, and retirement plans for the self-employed, including Simplified Employee Pension-IRAs and Keogh plans. When the IRS levies against a qualified retirement plan, the 10 percent penalty for early withdrawal does not apply.
What the IRS Cannot Levy
The IRS is restricted from levying against retirement benefits that are based on need. Therefore, if you receive Supplemental Security Income through the Social Security Administration because you are elderly, the IRS cannot levy against those SSI payments. The IRS also cannot access funds that you are not currently entitled to. So if you are still employed and your employer-sponsored plan does not permit withdrawals, or if you are not yet vested in the plan, the IRS can't make you request a distribution of the funds until you have a legal right to do so. In the meantime, the agency can levy against the account.
For some types of retirement payments, the Internal Revenue Code limits the percentage of income the IRS can levy against. Retirement, Survivors, and Disability Insurance -- a Social Security benefits program that is not based on need -- and civil service retirement payments are levied against at up to 15 percent. Railroad retirement benefits also are subject to the 15 percent limit. But as of late 2012, IRS policy was to not levy against them.
Avoiding a Levy
You can prevent garnishment or levy against your retirement pay. When you are notified of delinquent federal taxes, arrange to pay them, either through an installment agreement or by paying the outstanding amount in full. If you enter an installment agreement, you will still be liable for penalties and interest on the amount due.
Trudie Longren began writing in 2008 for legal publications, including the "American Journal of Criminal Law." She has served as a classroom teacher and legal writing professor. Longren holds a bachelor's degree in international politics, a Juris Doctor and an LL.M. in human rights. She also speaks Spanish and French.