Estimated Taxes and Withholding in Retirement

When you worked, your employer took tax out of every paycheck. In retirement, that happens only if you set it up. Without it, you could owe a lot at tax time, and possibly a penalty.

Key takeaways

• The IRS expects tax to be paid as income is received during the year
• You can ask for withholding from many retirement income sources
• Estimated payments are another way to pay during the year
• A review each year helps keep your payments close to your bill

Why this comes as a surprise

Social Security, IRA withdrawals, pensions, interest and investment gains do not always come with tax already taken out. Even so, the tax is still due. If too little is paid during the year, you may owe at filing time and may face an underpayment penalty.

Withholding: the simple route

Many income sources let you ask for tax to be withheld:

• Social Security: You can ask for withholding using Form W-4V.
• Pensions and IRA withdrawals: You can set withholding with Form W-4P, or with the form your account provider uses.
• Annuities: Often the same W-4P process applies.

Withholding has one helpful feature. The IRS generally treats it as if it were paid evenly through the year, no matter when it was taken out. Because of that, some people use it to even out a gap late in the year.

Estimated payments

If withholding does not cover your bill, you can send the IRS estimated payments during the year, usually in four installments. They are common for people with income from interest, dividends, capital gains, rental property or self-employment.

Ways to check where you stand

1. Look at last year's return to see your total tax.
2. Add up the tax withheld so far this year, from your pay stubs, 1099 forms and Social Security statements.
3. Think about anything unusual this year, such as a large sale or a Roth conversion.
4. Compare what you have paid with what you expect to owe.

The IRS offers a Tax Withholding Estimator on its website that can help you with step three and four.

Review each year, and after changes

Life events change your tax bill: a new source of income, the start of required withdrawals, the sale of a home, or the loss of a spouse. A midyear review lets you adjust before it is too late.

Sources and references

• IRS: Tax Withholding Estimator (opens in a new tab)
• IRS: Estimated taxes (opens in a new tab)
• IRS: Publication 505, Tax Withholding and Estimated Tax (opens in a new tab)
• Social Security: Withholding federal taxes (opens in a new tab)

This article is general information, not tax or investment advice for your situation. Tax rules, deadlines and penalties can change. Talk with a qualified professional before making decisions.