Paying Taxes in Retirement: Withholding vs Estimated Payments, and How to Avoid the Penalty

When the paycheck stops, so does the automatic tax withholding that came with it, and new retirees have to choose how to pay instead: withholding from Social Security, pensions, and IRA withdrawals, quarterly estimated payments, or a mix of both.¹ Get it roughly right and tax season is uneventful. Get it wrong and you can owe a lump sum in April plus an underpayment penalty, even if the total tax was exactly what you expected.

My first spring as a retiree I sat at the kitchen table with a 1099-R, an SSA-1099, and a pension statement, and realized that for thirty years the Ohio teachers’ payroll office had been doing something for me that nobody was doing now. Here is how withholding and estimated tax work once you are living on retirement income, and how to avoid the penalty, reviewed by a CERTIFIED FINANCIAL PLANNER.

Why retirees get caught out

Retirement income arrives from several payers, each withholding tax on its own default rules, and none of them knows about the others, so the total withheld is often less than the tax actually owed.¹ At work, one employer saw your whole salary and withheld on all of it. In retirement, Social Security, a pension, and an IRA custodian each act as if their check were your only income.

Three things usually drive the shortfall. Social Security withholds nothing unless you ask, even though up to 85% of the benefit can be taxable depending on your total income. IRA withdrawals often carry a flat 10% default, which is too little once they stack on top of other income. And the income that pushes more of your Social Security into the taxable column, the IRA withdrawals, is the same income that is being under-withheld. The way all these sources layer into one return is laid out in taxes in retirement.

Withholding from Social Security

You can ask Social Security to withhold 7%, 10%, 12%, or 22% of each monthly payment, and you can set it up or change it online through your my Social Security account or by phone.²³ There is no option for a dollar amount or a custom percentage, so it is a blunt tool, but it is free, automatic, and spreads the tax through the year.

Those four rates line up with common federal tax brackets, which makes choosing easier than it looks. A household where most of the benefit ends up taxable and the top dollars fall in the 12% bracket often picks 10% or 12%; one with large IRA withdrawals or a sizeable pension may need more. If you are not sure, the paper form is IRS Form W-4V, and the person at the Social Security office can process it with your benefit.¹ If your Social Security benefit is small or largely untaxed, you may need none at all. Which part of your benefit is taxable, and why, is explained in Social Security explained.

Withholding from IRAs, pensions, and annuities

Pensions and annuities paid regularly use Form W-4P, which works much like the W-4 you filled out at work; one-off and occasional IRA withdrawals use Form W-4R, where the payer generally withholds 10% unless you choose otherwise.⁴ Both forms let you raise the rate, and the W-4R lets you pick any whole percentage from zero up.

The IRA is usually the most flexible place to fix withholding, because you control the timing and size of every withdrawal. Some retirees set a higher rate on a monthly IRA draw so it covers the tax on Social Security as well; others skip withholding all year and take one larger withdrawal in December with a big chunk withheld, for reasons explained further down. Whatever you choose, the withholding rate is not your tax rate; it is just a prepayment, and the return in April settles the difference. The order you draw accounts in matters too, and retirement withdrawal strategies covers that side.

When estimated tax payments apply

If you expect to owe $1,000 or more when you file, after subtracting withholding and refundable credits, the IRS generally expects you to make estimated tax payments during the year.⁵ The year is split into four payment periods, and for 2026 the due dates are April 15, June 15, and September 15, 2026, and January 15, 2027.¹

Estimated payments are made with Form 1040-ES, online through the IRS payment tools, or by mail. They suit income that has no withholding attached, such as dividends and capital gains in a brokerage account, rental income, or a part-time consulting business. If a due date falls on a weekend or holiday, the payment is on time the next business day, and if you file your return and pay the balance by January 31, you can skip the January payment.¹

The safe harbor that prevents the penalty

You generally avoid an underpayment penalty if your withholding and timely estimated payments add up to at least 90% of the tax shown on this year’s return, or 100% of the tax on last year’s return; the prior-year figure rises to 110% if last year’s adjusted gross income was more than $150,000 ($75,000 if married filing separately).¹ You still owe whatever tax is left when you file; the safe harbor only protects you from the penalty.

The prior-year test is the one most retirees lean on, because you know the number already. Take last year’s total tax from line 24 of the 1040 (or 110% of it if you are over the income line), divide by four, and make sure withholding plus estimates reaches at least that much by each due date. In your first year of retirement this needs care: last year’s tax may include a full year of salary, so the prior-year number can be higher than the tax you will actually owe on retirement income, and the 90% current-year test may be the easier target.

The year-end withholding trick

The IRS treats tax withheld during the year as if one quarter of it were paid on each of the four estimated tax due dates, unless you choose to use the actual dates, which means withholding taken in December can cover an underpayment from earlier in the year.¹ An estimated payment does not get that treatment; a payment made in December counts only from December.

This is why some retirees deliberately take one IRA withdrawal late in the year with a high withholding rate. If you notice in November that you are short, a withdrawal you planned anyway, with enough withheld to reach the safe harbor, can fix the problem for the whole year. It also works for people who would rather not think about quarterly deadlines at all. The trade-off is that the withdrawal is taxable income in its own right, so it belongs in the year’s tax planning rather than being a panic move.

Building a simple system

The calmest approach for most new retirees is to estimate the year’s total tax once, then set withholding on the income sources they already receive so it covers that number, with estimated payments only for income that has nothing withheld.¹ Revisit it each year after the return is done, and any year your income changes a lot.

In practice that looks like this:

1. Add up the year’s expected income. Social Security, pension, planned IRA withdrawals, required minimum distributions, and taxable investment income.
2. Estimate the tax. Last year’s return is a starting point; tax software or a preparer can run a projection in a few minutes.
3. Choose where it comes from. Social Security withholding for a steady base, an IRA or pension rate for the rest, estimated payments only if you have big unwithheld income.
4. Check against the safe harbor. Make sure the total reaches 90% of this year’s tax or 100% (or 110%) of last year’s.
5. Look again in the fall. A Roth conversion, a large one-time withdrawal, or a capital gain can change the answer, and a December IRA withholding is the cleanest fix.

When I finally set this up, the answer was boring: 10% withheld from Social Security, a higher rate on my monthly 403(b) draw, and no quarterly vouchers. If you are still building a monthly spending plan around after-tax income, budgeting in retirement covers that side.

State taxes are a separate question

Social Security only withholds federal income tax, so any state tax on your retirement income has to be paid through withholding from an IRA or pension, or through your state’s own estimated payments.² States differ widely: some do not tax Social Security or most retirement income, others tax IRA withdrawals and pensions much like wages. Your state revenue department’s website will list its own forms and deadlines.

None of this is personalized tax advice. The figures and dates above are for 2026 and change over time, and a tax professional or fiduciary advisor can run your own numbers, including the first-year retirement situation where last year’s tax is a poor guide to this year’s.