You can’t get out of paying taxes, you can take steps to avoid certain IRS penalties.
If you don’t file taxes on time AND owe the IRS money, the IRS will charge this penalty equaling 5% of your unpaid tax bill per month. If you can’t submit your return by the deadline, request a tax extension. This won’t buy you more time to pay your tax bill, but allows you to pay the lower late payment penalty.
Late payment penalty
If you owe taxes and you don’t PAY (vs. file) by the deadline, you’ll face a late payment penalty equal to 0.5% per month. Prepare your tax return well ahead of the deadline so you’ll have more time to come up the cash or request the IRS installment plan.
Early retirement plan withdrawal penalty
If you remove funds your retirement before turning 59 1/2, you’ll face a 10% early withdrawal penalty on your distribution. There are however a few exceptions to this rule like if you’re at least 55 and separate from the employer sponsoring your 401(k) plan.
Under the CARES Act, early withdrawals taken in 2020 due to COVID-19 hardships will not be subject to the 10% additional tax if certain conditions are met between Jan. 1, 2020, and Dec. 31, 2020, and are under $100,000 or less in aggregate.
Starting in 2020, the age for withdrawing from retirement accounts changed. You must begin withdrawing from a retirement account by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old).
The CARES Act only suspended RMDs for 2020, and the most recent COVID relief bill didn’t extend the RMD suspension into 2021.
Once you turn 72, you’re on the hook for required minimum distributions or RMDs from your traditional IRA or 401(k). If you fail to do so the IRS will charge 50% (yes 5-0) tax penalty on whatever amount you neglect to remove.
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