How Do You Pay Taxes When You're Retired?

Written by Jonathan Vance, CFP®, EA

When you’re working a W-2 job, paying taxes can feel fairly automatic. You fill out a W-4 form, your employer handles the withholding, and by the end of the year, you may owe a small tax payment or receive a small tax refund.

If you’ve ever been self-employed, you know there are a few more steps involved. You might work with an accountant to calculate and submit estimated payments to the IRS and your state’s department of revenue each quarter.

But how do you pay taxes when you’ve stopped working?

Retirement introduces a new set of questions because your "paycheck" disappears. It is often replaced by a mix of income streams that may be exempt from tax, partially taxable, or taxed at different rates.

A retiree’s annual cash flow may come from a blend of income sources like:

• Social Security Benefits: 0-85% taxable depending on income.
• Traditional IRA Distributions: Generally taxed as ordinary income.
• Pensions and Annuities: Tax treatment varies by type.
• Taxable Investment Accounts: Varies by investment type. Commonly a blend of tax treatments from interest, dividends, and capital gains.

This shift makes tax withholding less automatic and more strategic. While this may feel confusing, it is a solvable puzzle if you start with the end in mind. The goal of this post is to help you understand how the pieces fit together to make retirement taxes a breeze.

How can you withhold taxes from your retirement income?

You can usually withhold both federal and state income taxes from these income sources:

• Part-time employment wages
• IRA distributions
• Pensions
• Non-Qualified Annuities

Federal taxes can also be withheld from

• Social Security benefit payments

Important note: Social Security only allows federal withholding at 7%, 10%, 12%, or 22%. So if your effective tax rate is, say, 17%, you could elect 12% withholding, and then you might need to make up the difference from other sources, like IRA distributions.

Some states tax Social Security benefits (Missouri does not), but you can’t withhold state tax directly from Social Security payments. That means you’ll need to plan ahead and use other income sources to cover your state tax liability if you’re in one of these states. 

If some combination of the above sources isn’t adequate to get you to your “safe harbor”, or the amount of tax you need to withhold during the year in order to avoid penalties, you may need to make quarterly estimated tax payments. 

Since remembering to pay the IRS four times a year can feel like a hassle, many retirees try to cover their liability through withholding first.

But should you always choose convenience? Not necessarily. There are specific cases where choosing estimated payments may better align with your current year tax strategy.

Is it better to withhold from retirement accounts or pay quarterly estimates?

This can be a strategic decision in addition to a convenience decision.

Remember: distributions from a Traditional IRA are generally taxed as ordinary income. This includes the portion of the distribution you use to withhold for taxes. 

For example, let’s say you are over age 59½ and need $10,000 in spending money from your traditional IRA.

• Scenario A (Withholding): You ask your custodian to “gross up” and withhold 20% for federal taxes. To get $10,000 into your pocket, you would withdraw $12,500. ($10,000 goes to you; $2,500 goes to the IRS). Your total taxable income to get $10,000 out of your account is $12,500.
• Scenario B (Estimated Payment): You withdraw just $10,000 from the IRA and write a $2,500 check to the IRS from your savings account. Your total taxable income to get $10,000 is $10,000.

Whereas scenario A may often be appropriate, you need to understand if it’s consistent with your strategy.

That extra $2,500 of taxable income could take up room in a tax bracket that you were hoping to use for Roth conversions, make more of your social security taxable, or even result in higher future Medicare premiums (IRMAA).

This same logic applies to taxable brokerage accounts. If you must sell assets to pay your estimated taxes, it matters what you sell. Capital gains are taxed at different rates depending on if they meet the IRS definition of short-term or long-term gains. Plus, it’s likely that some of your taxable account holdings have higher gains than others, which also plays a role. 

As we all know, the only two things that are certain in life are death and taxes.

How to simplify retirement tax payments in 2026

There’s plenty of things to be aware of when it comes to paying taxes in retirement, but having a repeatable annual process helps to remove the guesswork.

Here is the same four step process that I use with clients to minimize surprises:

1. Project taxable income. Tally every income source like wages, IRA distributions, pensions, Social Security, and strategic moves like Roth conversions, and subtract standard or itemized deductions.
2. Identify available withholding sources. Determine which accounts (IRAs, Pensions, etc.) allow for automated withholding.
3. Calculate the appropriate withholding. Figure out how much to withhold to meet your "Safe Harbor" threshold, ensuring you avoid underpayment penalties.
4. Select Strategically. Try to avoid withholding from sources that conflict with your tax planning strategy.

For accuracy, this exercise should be completed each and every year.

What worked in 2025 may not work in 2026 if your RMDs increase, your Social Security benefits begin, or your investment income changes. Don't just guess, re-calculate.

If you’d like to learn more about taxes, retirement planning, investments, and similar, browse through the other posts available in my blog.