When you’re working, taxes happen to you. Your employer usually withholds them from your paycheck, sends the money to the IRS, and you file in April to square up. The process runs in the background… but in retirement, it stops. For a lot of people, paying taxes in retirement is the part of the transition nobody warned them about.
Retirement income from Social Security, IRAs, pensions, and investments is each taxed at a different rate. Estimating, timing, and sending payments now falls on you, across four quarterly deadlines. That’s quite a shift.
“Managing your financial life can be overwhelming at times,” says Nancy Gates, Boldin’s lead educator and financial wellness coach. “But it doesn’t have to be.” The complexity of taxes in retirement is learnable.
To get a handle on paying them, you need a solid framework. That starts with knowing what you’re actually on the hook for.
How Is Retirement Income Taxed?
Each source carries its own tax rate and rules. Social Security, a 401(k) withdrawal, and a Roth distribution can all land in the same month and get taxed three different ways. “Each person’s circumstances are different,” Nancy says. “Each of you might have a different mix of income sources in retirement.”
The table below covers the federal treatment of common income sources:
| Income Source | Federal Tax Treatment | Key Detail | Notes / Links |
| Part-time / contract work | Ordinary income + FICA | Same rates as when working | Federal and state income tax apply |
| Pensions and annuities | Ordinary income | Often taxed at state level too | IRS Publication 575 covers the rules |
| Social Security | 0%–85% taxable | Depends on combined income | Most states don’t tax it, but rules vary — check yours |
| Interest / ordinary dividends | Ordinary income | Taxed as earned, not on withdrawal | Applies to taxable brokerage accounts |
| Qualified dividends / long-term capital gains | 0%, 15%, or 20% | Rate based on taxable income | Timing distributions can affect which bracket you land in |
| Traditional IRA / 401(k) withdrawals | Ordinary income | Deferred; IRS collects on the way out | 20% withheld by default from 401(k)s; 10% from IRAs |
| Roth IRA / Roth 401(k) withdrawals | Tax-free (if qualified) | Already taxed on contribution | Qualified = age 59½+ and account open 5+ years |
| HSA / 529 withdrawals | Tax-free (if qualified) | Must be used for qualified expenses | Non-qualified withdrawals are taxed and penalized |
| Regular savings accounts | Interest taxed as earned | Withdrawals don’t trigger additional tax | No deferred tax event on withdrawal |
| Required minimum distributions (RMDs) | Ordinary income | Must begin at 73 (if born 1951-1959) or 75 (1960+) | You may owe 25% excise tax on the amount not taken as required. |
Nancy flags RMDs as an income source many retirees underestimate. “The IRS is going to require you to withdraw a certain percent of your tax-deferred accounts every single year,” she says. “You don’t have to spend it, but you have to distribute it, and you have to pay the tax on it.”
Two IRS Rules That Protect You From Underpayment Penalties
The IRS has two tests that determine whether you’ll face an underpayment penalty. Knowing both gives you a concrete target to hit throughout the year.
“When you’re working, your employer usually withholds taxes from your paycheck and makes those tax payments to the IRS for you,” Nancy notes. “Once you enter retirement, you’re going to need to develop a tax payment strategy.”
Rule 1: Stay within $1,000 at filing, or hit the safe harbor
You avoid underpayment penalties if you owe less than $1,000 when you file. Owe more? You’re still covered if you paid at least 90% of this year’s liability, or 100% of last year’s (110% if your adjusted gross income topped $150,000, or $75,000 married filing separately).
The 100% prior-year option is an easier target since you already have the number. The 90% current-year option can work to your advantage when your income drops year over year, but you’ll need to have a reasonable estimate of what you’ll owe. You can ask Boldin AI to project your tax liability for the year and break it into four quarterly payment amounts, then adjust for any withholding you’ve set up.
Nancy explains why the safe harbor matters: “Our income levels are going up and down. There’s a lot of inconsistency in retirement.” It gives you a fixed target even when your income swings.
Rule 2: Pay across the year
Even if you hit the annual total, the IRS wants payments spread across all four quarters. Miss a quarter and you can face penalties, even if you’re owed money at filing. IRS Publication 505 covers the quarterly payment schedule in detail.
Gates gives a concrete example of where this trips people up. “Let’s say you take a large distribution or perform a large Roth conversion in January. If you wait to pay the tax until you file the next April, you could likely face a penalty.” The liability from January belongs in Q1, not 15 months later.
Four Ways to Pay Your Taxes in Retirement
There are four ways to get payments to the IRS in retirement. The right one depends on where your income comes from.
1. Withholding from income sources
If you get regular income from a pension, Social Security, or an annuity, you can set up federal tax withholding on each payment. Nancy calls this a “really powerful planning tool”: withholding is treated as paid across the whole year, even if you make adjustments late.
If you do a Roth conversion in January and rely on pension withholding to cover the tax bill, that withholding still counts toward your obligation as long as the total adds up.
2. Withholding from distributions
If you’re drawing from an IRA or 401(k), most custodians let you set a withholding percentage. Defaults are 10% for IRA and pension distributions, 20% for 401(k)s. Nancy points out that a lot of people don’t realize the default is already running.
“You do want to be mindful that financial institutions have default federal withholding rates,” she says. “They may be applying if you’re not making an election intentionally.” Like pension and annuity withholding, these amounts count as paid across the full year.
3. Withholding 100% of a single distribution
Less common, but worth understanding. You take a distribution and have the whole thing withheld. You get no cash, but the full amount counts as tax paid throughout the year. Some retirees do this in December to knock out the whole year’s bill in one move. Nancy is direct: “You’re only going to use the 100% withholding when it fits your broader cash flow plan.”
4. Quarterly estimated payments
If withholding doesn’t cover what you owe, you pay the IRS each quarter via EFTPS (the Electronic Federal Tax Payment System, a free Treasury service built for recurring payments) or IRS Direct Pay (bank account, no fees, two payments per quarter max). It takes more attention than the withholding options, but it’s the better fit when your income is irregular.
How to Use the Boldin Planner to Estimate Your Retirement Tax Bill
Before you can decide how to pay, you need a reasonable estimate of what you owe. “The Boldin Planner can account for most common types of income and project your tax liability annually through your lifespan,” Nancy says. “This can serve as a foundation for your tax payment method or strategy.”
That means modeling when you withdraw, from which accounts, and how you coordinate those decisions over time. The projection tells you which payment approach fits. Heavy pension income means you can adjust withholding and be done. Irregular distributions are messier, and quarterly payments tend to work better. If you’re planning a Roth conversion, the Roth Conversion Explorer can help you spot the years where the income math works in your favor.
Map your expected income a year or two out, make decisions about timing before the year starts, and you have a real shot at reducing your tax bill.
This article draws on a Boldin member education event on taxes in retirement hosted by Nancy Gates, Boldin’s lead educator. Nothing here should be taken as specific financial, tax, or legal advice. For help applying these concepts to your own plan, Boldin Advisors offers fee-only financial planning built around your Boldin plan.
Frequently Asked Questions About Paying Taxes in Retirement
There’s no single tax rate for retirement income. Traditional IRA and 401(k) withdrawals count as ordinary income, taxed at your regular federal rate. Roth IRA and Roth 401(k) withdrawals are tax-free if you meet the qualified distribution rules (account open five or more years, age 59½ or older). Social Security can be anywhere from 0% to 85% taxable depending on your total combined income. Qualified dividends and long-term capital gains are taxed at preferential rates (0%, 15%, or 20%) based on your total taxable income. Pensions, part-time earnings, and RMDs are all taxed as ordinary income.
Most retirees must set up withholding or make quarterly estimated payments to avoid owing an underpayment penalty. Many use withholding for consistent income, quarterly payments for the rest. The IRS wants estimated tax payments spread across the year. Your total must cover at least 90% of this year’s liability or 100% of last year’s, whichever is easier.
Up to 85% of Social Security benefits can be subject to federal income tax. The IRS calculates this using your adjusted gross income plus nontaxable interest plus half your Social Security benefit. At lower income levels, none of it is taxable. Most states don’t tax Social Security, but the rules vary enough that it’s worth checking.
RMDs from traditional IRAs and 401(k)s must start at 73, if you were born before 1960, or 75 if born after, under 26 US Code § 401 (applicable age). They’re taxed as ordinary income in the year you take them. If you miss a required distribution, you may owe 25% excise tax on the amount not taken as required.