Finding it hard not to overpay our tax withholding

[Out of Steam]

I've completed our tax returns in the past few days, and for the second year in a row, my wife and I are receiving the largest total tax refund we've ever gotten. We overpaid Federal taxes by about 40%. I understand the smaller Virginia overpayment is a one-time issue of an increase in the standard deduction that we can adjust withholding for.

Our overall Federal tax rate is quite close to 10%, with money withheld from my pension and our IRAs of about that amount. But we're taking in substantial income from 401(k) and TIAA accounts with mandatory 20% withholding, and there was no obvious means of reducing withholding from other accounts to make up for it.

My wife was somewhat overwithheld on a part-time job, but that was only 25% of the overpayment. She will start Social Security during the year, and we won't have taxes withheld at least until 2024.

Is the only answer is periodically transferring money to IRAs and drawing monthly payments from those exclusively?

Honestly, this looks like a setup for a large-scale annual loan from seniors to the Feds.

 

[Philliefan33]

Can’t you adjust your pension withholding to zero? Would that get you closer?

 

[Souschef]

All our withholding's from SS, pension, RMD's are set at zero. We use EFTPS, as many do here to do quarterly estimated payments, withdrawn from our checking account.
That way you have total control of your withholding. Just have it figured as 100% of your previous tax liability.

 

[cathy63]

... Our overall Federal tax rate is quite close to 10%, with money withheld from my pension and our IRAs of about that amount. But we're taking in substantial income from 401(k) and TIAA accounts with mandatory 20% withholding, and there was no obvious means of reducing withholding from other accounts to make up for it. ...

1) You can reduce withholding on IRA and pension distributions to 0. You may have to call the pension, and the IRA withholding was probably specified when you setup the withdrawals.

2) Find out if you can switch to periodic (monthly) distributions from the 401(k) and TIAA accounts. The custodians shouldn't be required to withhold 20% on periodic distributions, but they may still do so because it's easier, so ask them about it first.

3) Alternatively, roll over as much of the 401(k) and TIAA accounts as you can into the IRA where you can control the withholding. I'm guessing you may have part of these accounts invested in fixed income or other funds that aren't available in your IRA, so maybe do a partial rollover of the rest. Then even if with the 20% withholding, these accounts will make up a smaller portion of your income and that should help.

 

[Al18]

If you are retired and age 59 1/2 or older, I would transfer the 401k to an IRA, which has no required Federal Tax withholding.

If you have a taxable brokerage account and are in the 0% tax bracket (89K for MFJ), you could sell some stock to spend. Typically there’s no withholding on stock sales and dividends.

 

[Out-to-Lunch]

It doesn't help your refund problem, but if you wanted to, you could put (some of) the overdrawn money back into a tax-deferred account. It would be considered an indirect rollover. There is a limit of once-per-year for withdrawals from IRAs, but there is no such limit on withdrawals from 401(k)s.

 

[SnowballCamper]

Interesting, the once a year payment I get from the TSP doesn't have any withholding (even though I checked the box to withhold at the married with three dependents rate). As a result, I changed the pension withholding to account for additional income. I know it can be a pain to get the withholding tuned in, but I've found it's not too hard, though may take a couple to three years to get it right.

 

[Out of Steam]

All our withholding's from SS, pension, RMD's are set at zero. We use EFTPS, as many do here to do quarterly estimated payments, withdrawn from our checking account.
That way you have total control of your withholding. Just have it figured as 100% of your previous tax liability.

This may be what it takes. Perhaps have the mandatory 20% accounts as our only withholding and make up the rest through quarterly tax payments.

Withholding is very hard to manage with income coming from six sources, two of them with multiple accounts (TIAA). I can close my TIAA when a transfer payout completes in 2025, which would simplify management.

 

[Out of Steam]

Can’t you adjust your pension withholding to zero? Would that get you closer?

That would be an overshoot and leave us owing Federal taxes, especially with no withholding on my wife's Social Security.

 

[Out of Steam]

I know it can be a pain to get the withholding tuned in, but I've found it's not too hard, though may take a couple to three years to get it right.

I've been at this income structure since 2021 and seem headed in the wrong direction.

Right now, I'm working on a postmortem spreadsheet to get hard numbers on where the overpayments came from, as well as a YTD tracker for 2023, which I'll plan to tally quarterly.

EDITED TO ADD: Tallying up the overpayments, only about 1/3 seems to be from the items subject to mandatory 20% withholding. My wife's work and my IRA conversions were at about 15% withholding. Everything else was even at 10% or slightly high.

 

[Out of Steam]

It doesn't help your refund problem, but if you wanted to, you could put (some of) the overdrawn money back into a tax-deferred account. It would be considered an indirect rollover. There is a limit of once-per-year for withdrawals from IRAs, but there is no such limit on withdrawals from 401(k)s.

This is good to know for the future. I thought about buying I-series Savings Bonds with it, but we decided to put it towards the Alaska trip we're working on.