How to Liquidate an IRA to Pay IRS

Paying taxes with your IRA may lead to penalties.

Form 1040 Tax Forms image by Viola Joyner from Fotolia.com

Individual retirement accounts are intended to promote retirement saving among working Americans. The Internal Revenue Service discourages their use for most other purposes by imposing a 10 percent penalty on withdrawals before age 59 1/2. This penalty applies only to distributions of earnings from Roth IRAs. If the IRS has placed a levy against your IRA, you can use the IRA funds to satisfy the levy without incurring any penalty. Otherwise, IRA funds you use to pay federal taxes are subject to the usual IRA distribution rules.

Step 1

Contact your IRA trustee to inform about your plans to liquidate. There may be a form to fill out to cash out and close the account for good. There may also be a closing fee.

Step 2

Look for the liquidated funds. If you manage your IRA online, your funds may appear as cash within one to three days of the liquidation request. You can then transfer them to your personal checking account. Otherwise, the funds will likely be disbursed via mailed check. Allow an additional seven to 10 mailing days to receive the check.

Step 3

Pay the IRS tax bill. You may be able to pay online via ACH transfer. Otherwise, mail a check to the payment address on the bill.

Step 4

Report the IRA liquidation when you file your tax return. If the account you liquidated was a traditional IRA, report the entire amount on IRS Form 1040. If it was a Roth IRA, report the entire distribution on Line 15a of Form 1040, and the taxable amount — that is, the amount of earnings — on Line 15b. You can find the taxable and nontaxable figures on the Form 1099 you receive from your IRA trustee in late January or February during tax-filing season.