There are a variety of options – learn some of the pros and cons of each.
If you owe money to the Internal Revenue Service (IRS), here’s a breakdown of some common approaches to pay your bill:
- Paying in cash. Writing a check to the IRS may be the easiest way to pay your bill in full. Note that depending on the amount you owe, you risk draining your cash reserves needed for emergencies or other uses.
- Liquidating investments. Selling individual securities or funds from your portfolio can help you raise funds without depleting your cash savings. Still, you may face taxes on capital gains, a potential loss of future asset growth, or an asset allocation imbalance in your portfolio.
- Using a credit card. Paying with a credit card may allow you to earn card rewards based on the amount you owe. However, fees charged by the IRS to pay by credit card1 may often be higher than the value of any frequent flier miles, points, or cash back gained. And if you carry a credit balance, you may be subject to interest charges.
- Taking a traditional bank loan. A loan from a bank usually carries lower interest rates than credit card debt. However, it may require a lengthy application process and extensive paperwork, and you may incur loan fees and higher interest charges than some other options.
- Borrow from retirement accounts. Your retirement accounts could also be an option to help you pay your tax bill. Loan interest paid from a qualified retirement plan, such as a 401(k), is repaid to you through your retirement plan instead of the plan provider. Still, this is often not a popular option since you risk losing potential gains in the market and may have to pay the loan back in full if you leave your employer.
- Pay in installments. You can make arrangements with the IRS to make installment payments throughout the year rather than a one-time lump sum payment. This allows you to meet your obligation without having to deplete your cash savings all at once. Please note the IRS charges accrued penalties and interest until the balance is paid in full, and will charge additional fees if you take more than 120 days to pay the bill.2
- Use a Securities Based Loan. If you qualify, a securities based loan (SBL) uses eligible securities in your brokerage account as collateral for a loan or line of credit. By using a securities based loan you may be able to avoid liquidating your investments to raise cash. Borrowers who qualify for SBLs can potentially benefit from lower costs compared to other borrowing options. Also, the application process for these loans tends to be quick and requires relatively little paperwork, which can be a benefit if your tax bill is due in a short amount of time.
There are risks associated with a securities based loan, including the potential for having to repay your loan or replenish collateral if the value of the pledged securities drops.
Morgan Stanley clients should speak with their Morgan Stanley Financial Advisor, as well as their tax and legal advisors, about their options for paying their tax bill.