How to handle withholding when maxing out 401k at the beginning of the year?

Hi everyone.

I used to lurk and sometimes post on FWF from about 2004 to 2013. I’ve been here off and on since the demise of FW. It’s great to see some familiar faces.

This is kind of a long post so I will give a brief summary before I get into the details:

If my wife and I max out our 401k contributions at the beginning of the year, will the withholding from the rest of the year be enough to cover the taxes we will owe to the federal and state governments for 2019?

This year my wife and I are filling up our 401k’s as fast as possible thanks to a windfall from last year. Her match is based on annual salary and not on a per-paycheck basis, so we want to fill it up as soon as possible. I have no match.

The problem is that we are not really being taxed on our current earnings since our taxable amounts are too low. So far for this year we have only paid $150 to the federal government and $100 to the state. We have 2 exemptions each on our W4s. I’m wondering if our withholding will catch up once we’re done with our 401k contributions or if we need to adjust our withholding now and send estimated payments to the state.

For now we are being taxed as if we make next to nothing. I know that’s the point of pretax retirement savings, but it’s unnerving to be paying so little in taxes every two weeks. We’ve never made such large 401k contributions at once.

My wife’s income is temporarily low and will be increasing substantially well before the end of the year. My income is low and will likely decrease somewhat, though it’s possible that it may double (uncertainty due to returning to work after a long illness). My worry is that we won’t be taxed enough throughout the rest of the year to make up for what we’re not paying now.

I’ve already done some calculations and based on them will likely be submitting estimated income tax payments to the state just to avoid potential penalties. But I’m not sure if it’s completely necessary. I’ve spent hours running numbers on my own based on our taxes from last year. I’ve also been using paycheck calculators and tax estimators online. But every time I think I’ve got it figured out, I get a different result somewhere else. Most of the tools I’ve used assume you’re making regular 401k contributions and not larger amounts at the beginning of the year followed by none for the rest of the year.

Any thoughts from people who have done this before? In the past we have made regular 401k contributions throughout the year, so I wasn’t prepared for the tiny amount or complete lack of taxes we’d be paying right now.

As I mentioned above, my concern is that our increased withholding later on this year won’t be enough to cover the whole year’s taxes especially considering my wife’s income is going up.

Thank you!

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Some links that may help:

I am not an expert but here are some thoughts.

You are not penalized if you catch up by salary withholding. ie you can under-withhold for half the year and then catch up the second half of the year.

You should not have a penalty if you meet the safe harbor requirements based on prior year tax situation.

Hope this helps.

I’m kind of confused. Wont your 401k contributions reduce your taxable income anyways? That’s why the amount withheld is low. When the pay increases, the withholdings will as well; the withholding on each check is calculated independently, assuming that pay period represents your annual eanings. There isnt much being withheld right now because $100 income less $100 401k contribution equals $0 taxable income.

All things being equal, there’s a good chance your withholdings will be end up being “too much” for the year. Your higher paychecks later in the year will withhold assuming the higher amount represents your annual salary, when in actuality you’re annual income will be much less.


Depends on the competence of the employer’s payroll people/software. They should be using year-to-date numbers. If not throughout the year, then at least in the final months.

Thank you everyone for the thoughtful replies!

I should have been clearer with my questions and why I’m specifically concerned. I apologize for the confusion!

We have not contributed 100% of our checks to our 401k’s this year, since our employers don’t allow it. We still have taxable income so far this year.

Of the taxable income we have had so far, our respective payroll departments have only deducted a fraction of the tax we owe so far for the year. In other words, we owe $600 in federal taxes and $200 in state taxes, but we have only paid $150 and $100, respectively.

That’s where my concern is coming from.

I don’t generally pay such close attention to our withholding at the beginning of the year. For the longest time we have generally owed just a little bit or broken even at tax time.

Maybe the question I should ask is this: Is it normal for our payroll departments to be taking out so little at the beginning of the year?

Thank you again!

You simply need to review your withholdings for federal and state income taxes once a “normal” paycheck starts to occur.

Run a rough calculation of your income for 2019, figure out what your total tax withholdings will be by the end of the year, adjust your W-4 accordingly.

There is no IRS prescribed method of calculating withholding based on a year-to-date total.

You could engineer a number (divide YTD pay by number of pay periods to find a per-period withholding amount, multiply that by the number of pay periods, then subtract the YTD withholding to get a current withholding amount). But that goes far beyond “competence” and is as valid as making up a number to withhold.

What do you mean you “owe” $600 already?

$150 withheld over 1.5 months implies a YTD income of about $3800. Is it significantly more?

Again, it’s based entirely on your pay period earnings. Low paycheck equals low withholding.

OP, did you max your 401k’s last year also? It might help if you explain if the maxing early is simply early or more 401k contributions that previous years.

If your income is almost all W-2, making an estimate is practical. If you have significant income from capital gains and dividends, it’s not easy at all. In fact, there is information I need to complete my tax return that won’t be available until mid-March of this year, much less early in the tax year.

You can base your withholding on last year’s actual liability, but above a certain threshold, you must withhold not just 100%, but 110% of that (unless farmer or fisherman).

Federal underpayment penalties are not horrible; that is true. My state’s underpayment penalties are pretty harsh, though.

Are you worried about penalties or just having to pay a lot extra at tax time?

If penalties, just make sure you meet the PY safe harbor. If you’re worried about the additional liability, just start putting aside the money. Either way, you can wait until you see what the withholding will be for the rest of the year once your 401k contributions are 0, and can increase/decrease your withholding as a result of that.

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This isn’t about your question but…

Are you maxing your Roth IRAs too?

If you’re putting a windfall into retirement then I’d max the 401k match and then max your Roth IRA. I say this based on your account that your tax witholding for the year so far is just $100. You’re obviously in a low bracket, borderline 0.

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I agree… you will probably end up over withholding for the year.
For example, say you make $8000 a month. That puts you in the 22% bracket. If you withhold $1500 a month all year, most of that $1500 from a withholding standpoint would be against the 22% bracket.
Instead, if you withhold $7000 a month for 2 months, then $4000 the 3rd month, that money will count against the lower brackets as well. Thus the withholding on that will give you less of a tax break than doing monthly throughout the year ( less tax break = more withholding ).
At the end of the year (tax time), you will get the full, actual tax deduction which will all be against the 22% bracket and reduce your total tax bill more than the withholding in example #2 anticipated.

My guess is that it’ll even out enough by the end of the year. After you’ve maxxed out your 401k contribution, your taxable income will get larger than usual and withholding will follow.

Then in December, just look at where you’re at making sure you clear the requirement to avoid under-estimated tax withholding limits (these depend on income level). If over the year, you have withheld at least 90-110% of what you owed in taxes this year, you should be fine no matter what. If you’re not sure, it won’t be too late to make an extra tax payment in December.

Frankly, you can still make a 4th quarter estimated payment in the beginning of January and avoid penalties. Even if it’s the only estimate you pay for the year, it zeros out the 1040 balance due no differently than any other payment during the year. And no one is going to care you didnt make estimated payments the other 3 quarters*.

*Unless you’re intentionally reducing your per-paycheck withholding to zero, and then paying your entire tax bill in one last minute 4th quarter “estimate”. Then someone will care.

You could still owe penalties, and they’d be calculated automatically. Estimated payments aren’t the same as withholding where they’re considered spread out throughout the year.

But this is probably just semantics, it would probably be a pretty small amount, and besides the safe harbor, I think there are thresholds for when you actually have to pay penalties. Even if you owe penalties for failure to pay estimated taxes, probably looking at less than $100 (likely much less).

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The only way estimated payments are anything but one lump sum on your return, is if someone actually reviews your payments and when they were made. And even then, the variation has to be drastic and significant for it to even be brought up. Penalties are not automatically applied simply because you didn’t make an estimated payment some quarters.

The instructions for Form 2210 (see below) as well as the line item entries appear to indicate otherwise. Also, if you make estimated payments that are unequal, you must use the Regular Method of calculating the penalty which takes into consideration when each estimated payment is made.

I’m not saying you are incorrect in practice, and I will admit to being uncertain on the topic. I am looking at a penalty this year simply because only a small part of our income was W-2. It may be that I was supposed to initiate backup withholding on investments … don’t know … but otherwise, how does one get 110% of previous year’s liability or 90% (85% this one time) of current year without it?

As I mentioned, my state is really picky about this to the point that I am having to document the specific date when each penny of income was realized last year. And the penalty is by the quarter. I didn’t think that federal was like that, but this verbiage would make it appear it could be so.

If you made estimated tax payments and did not pay enough estimated tax by any of the due dates or did not have enough federal income tax withheld, you may be charged a penalty. This applies even if a refund is due when the return is filed. The penalty is figured separately for each due date. Therefore, you may owe the penalty for a payment that was due earlier, even if you paid enough tax later to make up for the underpayment.

P.S. To the original poster, I think we’ve swerved into a discussion of scenarios where you pay to get caught up by year-end … is there anything wrong with that? In YOUR case, your income was in fact quite a bit lower at the first of the year, so this isn’t applicable in your case.

Fair, you could be right. I’ve only dealt with this on my personal return, after a bill for about $20. It’s possible it was manually reviewed. I figured it was automatic because it was only $20. However, I very rarely encounter federal issues other than my personal returns, so not a great sample size.