Few of us enjoy paying taxes. But when you’re working, the task is usually pretty straightforward: Taxes are withheld from your paycheck throughout the year, and when it comes time to file your return, you square up with the IRS. Most people get a refund.
Retirees face a very different tax landscape — one that can be both confusing and costly. The U.S. tax system operates on a pay-as-you-go basis, which means you’re expected to pay taxes on taxable income year-round, not just when you file your tax return.
That’s not a problem when you have taxes withheld from your paycheck, unless you have a lot of additional income that isn’t subject to withholding, such as from investments or rental properties.
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But once your paycheck stops, you’ll need to rely on income from multiple sources, such as withdrawals from your savings, taxable investment income, Social Security benefits and payouts from a pension or annuity.
If you wait until April 15 to pay the amount of tax you owe, you could be subject to an unexpectedly large tax bill and an underpayment penalty.
Making matters worse, rising interest rates have increased underpayment penalties, which are based on the amount you owe and an interest rate that’s adjusted every quarter.
For the first quarter of 2025, the interest rate on underpayments was 7%, up from just 3% in the first quarter of 2022.
The IRS won’t assess an underpayment penalty if you owe less than $1,000 in taxes when you file your return.
In addition, you’ll avoid underpayment penalties as long as you pay at least 90% of the amount you owe, or 100% of the previous year’s tax bill if your adjusted gross income is $150,000 or less.
If your AGI exceeds $150,000 ($75,000 if you’re married and file separately), you won’t be hit with underpayment penalties if you pay at least 110% of the previous year’s tax bill.
Otherwise, you’ll need to make estimated tax payments, have taxes withheld from your income or employ a combination of the two strategies.
Calculating estimated taxes
Self-employed workers, landlords and people with a lot of taxable investment income are already familiar with quarterly estimated tax payments. But to many new retirees, calculating estimated taxes is unfamiliar territory.
You can avoid underpayment penalties — and an unexpected tax bill — by paying your taxes every quarter with IRS Form 1040-ES.
For income earned in 2025, the deadlines to make estimated tax payments are April 15 (first quarter), June 17 (second quarter), September 16 (third quarter) and January 15, 2026 (fourth quarter).
If you know how much you’ll owe for the year, you can divide your tax bill by four and submit that amount each quarter. But that method probably won’t work if you’re a new retiree, because your income, and the amount of tax you’ll owe, will likely be different from when you were working.
In that case, it may be worth enlisting a tax professional to help you estimate your tax bill based on your adjusted gross income, taxable income, deductions and credits for the year.
You can make adjustments each quarter to account for changes in your circumstances.
If you have a lot of fluctuations in your income — from investments, for example — you may opt for the annualized method instead. This method calculates your estimated tax liability as your income accumulates throughout the year. (Business owners who have significant seasonal income often pay their estimated taxes this way.) If you use this method, you will need to file IRS Form 2210 with your tax return.
You can make estimated tax payments by mail using Form 1040-ES, online or from your mobile device using the IRS2Go app.
You can also pay estimated taxes by creating an online account, which allows you to keep track of your payments. That’s a good idea, because you’ll need to report them when you file your tax return. (Estimated tax payments go on line 26 of Form 1040; tax software will walk you through this process.)
You can make estimated payments more frequently — once a month, for example — as long as you’ve paid enough by the end of each quarter to avoid underpayment penalties.
Determining your withholding
If you’d like, you can arrange to have taxes withheld from several of your retirement income sources. You even have the option to adjust withholding from those sources to account for income that isn’t subject to withholding, such as taxable investment income.
The trick is figuring out how much to have withheld, which can be a challenge if you’re a new retiree.
The IRS requires financial services providers to withhold at least 10% of withdrawals from traditional IRAs, as well as SEP and SIMPLE IRAs, unless you instruct the providers to do otherwise.
If you still have a 401(k) plan, your former employer will usually withhold 20% of the amount you withdraw. (The 20% withholding rule usually doesn’t apply if you roll your 401(k) plan into a traditional IRA.)
The taxable portion of pensions and annuities may also be subject to automatic 10% withholding, depending on how you receive payments.
Although these automatic withholdings will cover a portion of your tax liability, they probably won’t cover your entire tax bill, says Miklos Ringbauer, a certified public accountant in Los Angeles.
Avoid underpayment penalties
To avoid underpayment penalties, you’ll need to increase the amount your provider withholds from your withdrawals to include federal and state taxes. Applying the tax bracket you fell into when you were working is a good starting point, says Rob Williams, managing director of financial planning for Charles Schwab.
For example, if you were in the 22% tax bracket when you were working, you could arrange to have 22% withheld from your IRAs and 401(k) plans.
Ideally, though, you should work with a tax professional to figure out how much you should have withheld, based on your expected income for the year, Ringbauer says.
It’s also important to keep taxes in mind when you estimate how much you’ll need to withdraw from your savings to cover your expenses, Ringbauer says.
For example, if you estimate you’ll need $5,000 a month to cover your bills, you should increase the amount you withdraw to account for taxes, depending on the amount you want to have withheld.
Withholding for Social Security benefits
You may also need to have taxes withheld from your Social Security benefits to avoid underpayment penalties.
If you have other sources of income, there’s a good chance you’ll pay taxes on up to 85% of your benefits. The formula is based on what Social Security defines as a beneficiary’s provisional income, sometimes referred to as combined income.
Your provisional income is based on half of your Social Security benefits, plus other sources that contribute to your adjusted gross income, including wages from a job, withdrawals from traditional tax-deferred accounts and dividends, interest and capital gains from taxable investment accounts.
Interest from municipal bonds, which is generally tax-free, is also included when calculating your provisional income. If your provisional income ranges from $25,000 to $34,000 for single filers, or $32,000 to $44,000 for joint filers, up to 50% of your benefits will be taxable.
If your provisional income is more than $34,000, or $44,000 for joint filers, up to 85% of your benefits will be taxable
In 2020, an estimated 56% of retirees were paying taxes on a portion of their benefits, according to the Center for Retirement Research at Boston College. The Center projects that 58% of beneficiaries will pay taxes on their benefits in 2030.
The IRS provides a calculator you can use to estimate the amount of your benefits that will be taxable.
You’ll need the amount of Social Security benefits from Box 5 on Form SSA-1099, which Social Security mails out to beneficiaries each January, along with the amount of income you receive from other sources, such as wages, pensions and IRA withdrawals, and any interest you earn from municipal bonds.
You can arrange to have taxes withheld from your benefits by filling out the Social Security Administration’s Form W-4V and mailing it to your local Social Security office.
You can choose a withholding rate of 7%, 10%, 12% or 22%, and you can change or stop withholding by filing a new Form W-4V.
Again, it’s important to keep in mind how much your benefits will be reduced by withholding when calculating the amount they’ll contribute to your annual income.
Retirement tax: A useful workaround
As long as you have enough withheld to avoid underpayment penalties, the IRS doesn’t care where the money comes from.
With that in mind, you can ask your IRA provider to withhold enough from your withdrawals to cover the estimated tax on those distributions as well as taxes on your Social Security benefits, investment income and other taxable income.
For example, if you estimate that you’ll owe $30,000 and plan to withdraw $100,000 from your IRA during the year, you could have 30% withheld from each distribution, which would cover all other sources of your income. (Just make sure to adjust withholding on other sources to 0% to avoid overpaying your tax bill.)
Even if you wait until the end of the year to take a lump-sum distribution, you’ll avoid penalties because taxes withheld from an IRA distribution are considered paid evenly throughout the year. This exception is particularly useful for retirees who are subject to required minimum distributions from their tax-deferred accounts.
Currently, retirees who are 73 or older must take RMDs from their traditional IRAs, based on the account balance on December 31 of the previous year, divided by a factor the IRS provides.
If you’re subject to RMDs but don’t need the money to live on, you can wait until December to take your RMD and ask the provider to withhold enough money to cover taxes on the distribution and any other taxable income you’ve earned over the year.
You can have as much withheld as you need to cover your tax bill — up to 100% of the distribution if you have a lot of other taxable income, for example.
The advantage of this strategy is that you can continue to collect investment earnings on your savings until the end of the year.
Brush up on retirement tax rates
When you calculate the amount of tax to have withheld from income sources and/or how much to pay in estimated taxes, it’s important to understand the tax rates that apply.
Ordinary income tax rate (10% to 37%)
- Wages from a side gig or part-time job
- Interest payments
- Ordinary dividends
- Capital gains on assets held for a year or less
- Withdrawals from traditional IRAs, 401(k)s and other tax-deferred plans
- Taxable Social Security benefits
- Taxable portions of annuity payouts
- Pension payouts
- Rental income
- Withdrawals from health savings accounts (HSAs) for nonqualified expenses
Long-term capital gains tax rate (0% to 20%, depending on total taxable income)
- Qualified dividends
- Sales of securities and other assets held for more than a year
- Profits from the sale of a business
Net investment income tax rate (3.8%)
- Imposed on interest, dividends, long- and short-term capital gains, rental and royalty income and nonqualified annuities if your modified adjusted gross income is $200,000 or more as a single filer or $250,000 or more as a married couple filing jointly
0% tax rate
- Withdrawals from a Roth IRA if you’re 59½ or older and the account has been open for at least five years
- A gain of up to $250,000, or $500,000 for married couples who file jointly, on the sale of a primary residence you lived in for at least two of the past five years
- Withdrawals from HSAs for qualified medical expenses
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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