Is Increasing My 401(k) Withholding the Key to Maximizing My Retirement Income?

One of the most important decisions anyone can make is how to handle retirement income before and after you call it quits. Arguably, the biggest consideration is handling 401(k) accounts alongside Social Security, RMDs, and anything else you might have available to live on during retirement. 

With this in mind, one Redditor posting in r/retirement asks how to best move forward after one year of retirement. Between Social Security, a small annuity, and a 401(k) account, they are worried about how to avoid losing potential gains when they need to withdraw money to pay the government. 

This is a tricky question to answer about whether increasing 401(k) withholding is the best path forward, but there do seem to be a few more considerations to take into account before making a final decision on what to do next. 

The Situation

Having completed their first year of retirement, the Redditor is now thinking about the best way to handle 401(k) withdrawals and how they might impact quarterly taxes. Between Social Security, a small FERS annuity, and the 401(k) account, there is no federal withholding on the annuity being taken out, so the Redditor’s tax person says they need to make quarterly payments instead. 

As a result, the 401(k) holding is now up to 20%, so to get $2,500 into a checking account every quarter, the Redditor has to make a $3,125 withdrawal. The question is whether it’s a good idea to bump up the withholding once a quarter to cover the $2,500 entirely. 

By doing so, the Redditor would not lose potential gains on the additional $625 they withdraw every quarter. The larger concern is that they lose a few hundred dollars yearly, which adds up in a bull market when they take out these additional gains they don’t need. 

The original poster recognizes that we’re not talking about big numbers, but this doesn’t minimize the importance of what to do next. 

How to Move Forward 

Overall, the first few Redditors commenting on this post think this is being handled pretty spot on. These individuals think that doing the withdrawals this way, with quarterly activity, helps ensure the original poster doesn’t forget to make a withdrawal. 

However, one Redditor has a great option that the original poster did not think of, which looks pretty intriguing and something they should quickly discuss with their tax person. The IRS treats withholding as occurring throughout the year, but quarterly payments are not.

This means you can (likely) pull out the money at once in the fourth quarter without any concerns about missing out on any requirements to match quarterly income with quarterly estimated tax payments. This Redditor can ask their tax advisor to withhold 100% of a single payment in December and still be compliant, so long as the payment is big enough to cover what is owed. 

Alternative Options 

Knowing that this Redditor might have found a better option than what they are doing now, they should explore some different avenues while knowing that the one they are on isn’t outrageous either. Of course, one final Redditor suggested not making quarterly payments but taking the tax payments from their pension and Social Security. 

They acknowledge this could mean a penalty when filing taxes, but they believe the paperwork reduction is worth the risk. However, given that this Redditor is already retired, it’s hard to understand what penalty would be required, so that’s another question for the tax advisor. Given that these two situations feel very similar on paper, there might be a third avenue to explore as well for next year.  

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