When tax time rolls around, it is not uncommon for many to become worried because they don’t have the money to pay what they owe. This is a reality for many taxpayers.
When it comes to paying what you owe in taxes, you do have options. However, you must be careful about what you choose.
Here are some important tips and tax payment options to keep in mind if you find yourself in this predicament this tax season:
Credit Cards
Interestingly enough, the IRS accepts credit card payments. So, if you are having trouble paying all at once with money from your regular budget, you can put your tax payment on the credit card. Of course, the problem with using a credit card is that you have to pay high interest.
One way to alleviate some of the cost of high interest when you pay with a credit card is to use a card that is in its introductory period; you can save if you have a 0% credit card. This can give you a little time to pay your tax obligation a little at a time. But you need to be careful since it can get even more expensive to pay high rates of interest on what you owe if you carry the balance too long with your credit cards.
Raiding Your Retirement Fund
Some people consider raiding their retirement funds in order to get the money they need to pay taxes. This can work as well, but it’s important to realize that there can be costs associated with this tactic as well. One of the biggest issues is the penalty. When you withdraw money from a retirement fund prior to reaching the proper retirement age, you are required to pay a penalty – and more taxes, since the withdrawal is treated as income.
There are some ways to avoid some of the penalties, however. If you have a Roth IRA, you can withdraw your contributions (not your earnings) without penalty. You will have to make sure that the withdrawal is properly reported, however. Another possibility is to take out a loan against your retirement account. You won’t have to pay taxes, or the penalty, as long as you repay the loan in the required timeframe. And, of course, the interest you pay is repaid to yourself.
The big problem with raiding your retirement fund, though, has to do with opportunity cost. Once you pull that money out of your retirement fund, it’s no longer working on your behalf. It’s not earning interest the entire time that it is out of your account. Until you pay it back into your account, it’s not growing. That missed opportunity can be costly – even if you aren’t technically paying interest to someone else.
IRS Installment Plan
If you are looking for another option, the IRS installment plan is worth considering. You can use the plan to get more time to pay. The plan offered by the IRS comes with fees and interest as well, but the cost is usually much less than what you would pay using a credit card. However, you will need to weigh the pros and cons of the installment plan vs. raiding your retirement account. Could your money earn you more in the long run by remaining in the account and overcoming the cost of the IRS installment plan? Or are your likely returns low enough that it’s better to save on the fees associated with the IRS plan?
In the end, you do have options for discharging what you owe to the IRS. You have payment options that can help you pay your taxes – even if you don’t think you can afford to.