'I haven't filed taxes in 20 years': I'm 55 and about to get laid off. I've $1 million in crypto. Am I in big trouble?

By Quentin Fottrell

'I have $800,000 split across two 401(k) plans and a $69,000 lump-sum pension'

"I believe Social Security will be insolvent in 15 years. I would welcome the extra check, but I'm not counting on it." (Photo subject is a model.)

Dear Quentin,

I'm 55 and expect to get laid off from my $170,000 job. I have $800,000 split across two 401(k) plans and a $69,000 lump-sum pension. My wife and I each have $150,000 in Roth IRAs, $400,000 in real-estate equity (with a mortgage of less than $50,000) and about $1 million in crypto (up 88% over 12 months and climbing daily).

My wife is the sole heir to her childhood home, inching towards $1 million. I took out a $1 million 20-year term-life policy on myself, but I will likely outlive it with only four years left. We have no college debt, credit cards, kids or car payments. We spend about $60,000 yearly (including leisure travel and $12,000 on the mortgage).

I expect to use "rule of 55" withdrawals to pay off the mortgage and sell small amounts of crypto to carry us to age 59 1/2. I don't plan to claim Social Security until age 70, when my wife will likely inherit the house. I believe Social Security will be insolvent in 15 years. I would welcome the extra check, but I'm not counting on it.

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Selling crypto, paying off mortgage

Crypto has been good to me, but it will likely take a year or two to adjust to the new regulatory landscape. In the meantime, paying off the mortgage and selling a little crypto here and there is my plan to tread water for five years to reach 59 1/2. Can I retire early with these numbers? Or am I expecting too much from my crypto?

The elephant in the room is that I haven't filed taxes in 20 years. I've always had taxes withheld and I'm not hiding any undeclared or illicit income; I just haven't filed in forever. I only bought and held crypto starting 10 years ago with KYC-compliant purchases, so over 97% of my balance is unrealized gains - no unpaid taxes there.

I don't know what professional help I need to get right with the Internal Revenue Service and several states. A CPA and tax attorney? I feel like we have enough retirement savings. The future rental income will certainly help, and the crypto may grow into the millions. I just don't want to leave a mess for my wife if I die first.

Stumbling into the FIRE

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

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Between your $869,000 in tax-deferred accounts and your $300,000 Roth, a 4% annual withdrawal rate would give you $48,000 a year.

Dear Stumbling,

You buried the lede.

You have organized all other aspects of your finances, so it's unfortunate that you dropped the ball with the IRS, the one creditor that never goes away. With that in mind, hire a CPA and immediately throw yourself at the IRS's mercy. That sounds dramatic, yes - but it sounds worse than the reality. I suspect anxiety over not filing has kept you from dealing with this issue.

Given that you were employed during this time, it's not as bad as it could be if you were self-employed and were living off the tax grid. "The IRS prefers that you file all back tax returns for years you have not yet filed," TurboTax says. "That said, the IRS usually only requires you to file the last six years of tax returns to be considered in good standing."

But you may have missed out on years of tax refunds. "The IRS can go back more than six years in certain instances," it adds. "Unfortunately, there is a limit on how far back you can file a tax return to claim tax refunds and tax credits. This IRS only allows you to claim refunds and tax credits within three years of the tax return's original due date."

Don't miss: My wife and I are in our 50s and have $11 million. We're not leaving it to our kids. Is that wrong?

'Rule of 55'

You're in good shape to retire early, even taking into consideration that crypto can be highly volatile. But even if your crypto portfolio fell by 50% over the next year (and there's no existing reason that it should), you'd still be able to live and maintain something close to your current lifestyle. You may, however, have to rein in your vacation expenses.

A reminder for some of our readers: The "rule of 55" is an IRS provision that allows you to take penalty-free withdrawals from your current employer's 401(k) or 403(b) if you leave your job in the year you turn 55 or later without incurring a 10% early-withdrawal 10% penalty. Of course, you'll still have to pay regular income tax on those withdrawals.

In order to keep up with your current level of spending, you can rely on 401(k) withdrawals under the "rule of 55" and take $40,000 to $50,000 a year in addition to $10,000 to $20,000 of crypto sales. Between your $869,000 in tax-deferred accounts and your $300,000 Roth, a 4% annual withdrawal rate would give you $48,000 a year.

Applying the "rule of 55" will be dependent on the conditions of your plan, specifically whether the administrator permits partial and early withdrawals. "Many plans do not offer partial withdrawals once you've left your job," Fidelity says. "This could mean you'll need to withdraw the entire account balance at once - potentially incurring taxes, even if the penalty is waived."

"If your workplace plan is a Roth 401(k), withdrawals will avoid penalties under the 'rule of 55,'" the company adds. "While the 'rule of 55' grants early access to funds, it's important to consider the long-term impact on your retirement savings. Withdrawing significant amounts could reduce your portfolio's growth potential and affect your future financial security."

Related: My wife and I are in our 50s and have $11 million. We're not leaving it to our kids. Is that wrong?

On the way to 65

Adding your Social Security benefits at age 70 and your wife's future inheritance, you have enough of a cushion to get you through the next 15 years. If your wife doesn't work, you will also have to pay for health insurance until you reach 65 and qualify for Medicare. Factor those costs into your plans.

You may also wish to roll over your former 401(k) into your existing employer's plan before your expected layoff, if you want access to more of your funds penalty-free using the aforementioned "rule of 55." This would allow you to leave your Roth IRA untouched for later so it can continue to grow tax-free.

As for your $1 million life-insurance policy, you don't have kids who will benefit from it and, while nobody knows what's around the corner, you will probably live a long life beyond the 20-year term, so you will have a decision to make about whether to continue paying the growing premiums. That also raises the topic of long-term care insurance.

Call that CPA today.

Related: 'The selling agent is long dead': My $250,000 term life-insurance policy costs $2,000 a month. I'm 80. Is it time to ditch it?

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More columns from Quentin Fottrell:

'I'm confused!' Why does President Trump want a rate cut so badly?

'I am a senior citizen': My car needs $3,500 for repairs, but only has a trade-in value of $6,000. Do I bother fixing it?

'I'm tired of corporate America': My wife and I have $1.65 million. I'm 61. Can I retire already?

-Quentin Fottrell

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09-28-25 1323ET