I Owe $140,000 To The IRS

Summary

Podcast Summary: The Ramsey Show Highlights Episode: I Owe $140,000 To The IRS
Release Date: May 29, 2025
Host/Author: Ramsey Network
Duration: Under 10 minutes

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1. Introduction to Marty's Financial Predicament

In this episode, Marty reaches out for advice after discovering he owes a substantial $140,000 to the Internal Revenue Service (IRS) due to an early withdrawal from his 401(k) account. He initially withdrew $400,000 with the intent of allocating approximately $300,000 towards a house down payment. However, Marty finds himself in unexpected tax debt, threatening his financial plans.

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2. Breakdown of Marty's Financial Situation

Income and Debt Overview:

• Annual Income: Marty reports an annual income of roughly $130,000 ([02:03]).
• Loan Details: He withdrew $400,000 from his 401(k), aiming to use $300,000 for a house down payment. Despite this, he still owes $256,000 on his mortgage ([02:35]).
• Savings and Investments: Marty holds a Roth IRA, a Traditional IRA, and maintains a savings fund of approximately $60,000. He does not have any other non-retirement investments ([02:40]).

Marty's Concerns:

• Tax Debt: The unexpected $140,000 tax liability from the early 401(k) withdrawal.
• Debt Management: Uncertainty about the best course of action to settle the IRS debt without jeopardizing his home purchase.
• Financial Planning: Seeking guidance on whether to utilize a home equity loan or pursue a personal loan to address the tax burden.

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3. Expert Insights and Recommendations

Rachel Cruze's Advice:

Rachel emphasizes the importance of addressing the IRS debt promptly and recommends leveraging personal loans over home equity options. She states, “[...] I would rather owe a bank than the IRS at that point” ([00:24]). Rachel advises Marty to consider a personal loan or possibly a credit union option instead of a Home Equity Line of Credit (HELOC), citing concerns over high-interest rates and the risks associated with leveraging his home ([03:48]).

Ken Coleman's Perspective:

Ken echoes Rachel's sentiment, highlighting the complications of dealing directly with the IRS, such as wage garnishments and limited communication channels. He suggests, “[...] I would clear that down to a thousand bucks today” ([03:04]), advocating for minimizing IRS debt as swiftly as possible. Ken supports the idea of taking out a personal loan to manage the remaining balance, stressing that this approach is more manageable compared to an IRS payment plan ([04:18]).

Strategic Financial Steps:

Rachel outlines a strategic approach aligned with the Ramsey Network’s Baby Steps:

1. Eliminate Savings Contributions: Utilizing Marty's $60,000 savings fund to address the tax debt ([03:16]).
2. Avoid Additional Debt: Recommending against further leveraging of his 401(k) or home equity to prevent exacerbating his debt situation ([04:22]).

She emphasizes the importance of avoiding high-interest debt avenues like credit cards, suggesting that a personal loan would be a more fiscally responsible choice ([03:12], [02:54]).

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4. Summarized Conclusion and Action Plan

Marty is advised to:

1. Utilize Savings: Tap into his $60,000 savings to reduce the IRS debt immediately.
2. Secure a Personal Loan: Seek a personal loan to cover the remaining balance, thus avoiding the complications and high-interest rates associated with HELOCs or IRS payment plans.
3. Financial Prudence: Avoid additional borrowing against his home or retirement funds to maintain financial stability and protect his assets.

Notable Quotes:

• Rachel Cruze on Personal Loans: “[...] I would rather owe a bank than the IRS at that point” ([00:24]).
• Ken Coleman on Managing IRS Debt: “I would clear that down to a thousand bucks today” ([03:04]).

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5. Final Thoughts

This episode underscores the crucial importance of thorough financial planning and understanding the implications of significant financial decisions, such as early retirement account withdrawals. Marty’s situation serves as a cautionary tale about the potential pitfalls of mismanaging retirement funds and highlights the value of expert advice in navigating complex financial challenges.

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For more practical financial advice and strategies, listeners are encouraged to explore additional episodes and resources offered by the Ramsey Network.

Transcript

[Dave Ramsey]

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[Marty]

I just recently found out that when I go to file my taxes, I am going to owe roughly $140,000 in taxes due to early withdrawal. I took out of a 401k last year.

[Rachel Cruze]

Okay.

[Marty]

And I'm going to to put down on a house. So my question, I'm trying to figure out where the best place to pull money from either a home equity loan. Really don't want to do a payment plan with irs, but I just don't know the best path forward.

[Ken Coleman]

Did you know that this would be. That you would have to pay taxes on that money when you pulled it out, did you know that this was coming?

[Marty]

So I. There's no blame. I did talk to several individuals when I pulled the money from the 401k about how I wanted to pay all the fees and taxes upfront. I didn't do my part on the research and I was misinformed that it had been paid. It was all caught up and I didn't realize, oh, she'd be near that much. And I didn't realize it hadn't been done until I went to file my tax.

[Rachel Cruze]

Oh, gosh, I'm sorry. You know, Marty, honestly, I'd probably go pull a personal loan for. I think I would rather owe a bank than the IRS at this point, especially for the amount it is. It's going to take you a while to write pay it off, because how much do you make a year?

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[Rachel Cruze]

How much do you make a year?

[Marty]

Roughly 130,000.

[Ken Coleman]

Oh, man. How much did you pull out?

[Marty]

I pulled out 400,000 because I wanted roughly 300,000 for a down payment because I want to pay the house off. I've been going through the steps. I don't have any other debt.

[Ken Coleman]

Did you pay the house off? Is the house free and clear?

[Marty]

No, I still owe 250, 256 on the house gracious.

[Rachel Cruze]

And do you have any money in any other investments that are not retirement, non retirement investments?

[Marty]

I have no. I have a Roth and a traditional IRA and then I have about $60,000 in savings, which is my savings fund.

[Rachel Cruze]

Okay.

[Marty]

And I don't know if I should tap into that. Yes, I don't want to.

[Rachel Cruze]

Yeah, no, I would. But I would, I would for sure.

[Ken Coleman]

Yeah. I, yeah, Rachel's point. I would clear that down to a thousand bucks today. And, and you hear that.

[Rachel Cruze]

And you'd have about an $80,000 loan at that point. And I, because I was going to say even with your income, I don't know if you'd qualify for a personal loan in a bank, I mean, depending on the situation.

[Ken Coleman]

So, yeah, I try, I try it though. Once you've knocked it down, I would.

[Rachel Cruze]

Yeah, I would rather have an eighty thousand dollar loan than a one hundred forty thousand dollars. So yes, Marty, that savings is what we would say would go. Because I would put this in baby step two in the debt snowball. And you have no other debt. And so but I would, I would, I would earmark this like that. I mean that, that, that's especially IRS stuff. You want them out asap. So, yeah, I would pay down as much as I could right now and then take the rest out just from like a credit union or a bank and do a personal loan versus having a payment plan with the irs.

[Ken Coleman]

And it's going to be easier for you to manage because the irs, like, they're, they're hard to contact. They don't contact you via email. They, it's only mail. Like the way they do it is.

[Rachel Cruze]

And they can do stuff with like garnishing wages. It just makes me nervous. I don't like it. And from a interest I would not do it. I would not do an heloc. I would not put your home no more debt on that. I would not put the home at risk there. And with HELOCs, the interest rates are sometimes insane. So I think, I mean, my best bet would be it would probably be a personal loan. I think that would be a, the best route.

[Ken Coleman]

Yeah, I said no more debt, but I meant no more leveraging very important things for debt.

[Rachel Cruze]

Like that's right.

[Ken Coleman]

No more borrowing from your 401k and no more like leveraging your house for sure.

[Rachel Cruze]

Oh, I'm sorry, does that help?

[Marty]

It does. And that was where I wasn't sure if taking the equity of the home was better or just trying to get a personal loan.

[Rachel Cruze]

Yeah, for sure. Yeah. Yeah, I would go the personal loan route. And again, we're not big on the. Well, we, we rarely talk about, like, borrowing money, but this would be a case you're already in the hole. So rather be in the hole with a bank than the IRS at that point. And, you know, and, and your credit card interest rates and stuff can be up. We're to 18, 20. You don't want it on a credit card, you know, like, don't put it on the credit card, you know. So again, personal is probably going to be your best bet. Sound.

[Ken Coleman]

That's true. Oh, this is. That's terrible. He got bad information.

[Rachel Cruze]

Yep. That's not fun at all. I'm sorry about that.

[Dave Ramsey]

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