How can I recoup a percentage of the tax on a distribution from my 457(b) account?

I was thinking about taking a distribution from my 457(b) account ($20K). Vanguard informs me that they would deduct 20 percent from my distribution for taxes. I will be filing my 2019 1040 (next year), and will be looking to recover about 8 percent of that 20 percent mentioned above. How is that accomplished? My income (for 2019) will be from a government pension and Social Security, and I expect my tax bracket to fall in the 12 percent income tax level.

Distributions from 457(b) accounts are taxed as ordinary income in the year of distribution. Optional or one-time distributions such as this one are considered Eligible Rollover Distributions and are subject to a 20 percent mandatory withholding. To opt for no withholding or a lower withholding amount, distributions must be part of a rollover to another retirement account or a series of periodic distributions.

Excess withholdings over a tax year are recovered when filing the annual 1040 tax return early the following year. Refunds are paid to the taxpayer or credited to another tax year, generally at the taxpayer’s option. Refunds can be accelerated by early filing and requesting an electronic refund credited directly to the taxpayers designated bank account.

In this questioner’s case, however, there is another strategy that could reduce or eliminate the overpayment created by the 20 percent withholding rate on the optional 457(b) distribution. The taxpayer can elect to reduce the withholding on the retirement distributions received from Social Security and the government pension. Since those retirement distributions are a series of periodic payments, the taxpayer may elect lower withholding on them to account for the higher withholding on the 457(b). Federal withholding amounts can be managed by filing Form W-4V for Social Security with the Social Security Administration and a W-4P for the government pension with the pension payer. Be careful not to overcorrect and reduce withholding too much. You want to avoid an underpayment penalty.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Thomas N. Alvaré, CPA, is managing principal with JFS Wealth Advisors in Doylestown, Pa.