During your career, tax withholding happens largely in the background.

Your employer calculates withholding from each paycheck. Taxes may also be withheld when you receive a bonus, when RSUs vest or when nonqualified stock options are exercised.

Retirement changes that system.

Instead of receiving income from one employer, you may receive money from several sources:

  • Pension payments
  • IRA withdrawals
  • Social Security
  • Deferred compensation
  • Investment income
  • Capital gains
  • Annuity payments
  • Consulting income
  • Required minimum distributions

Each source may follow different withholding rules. Some may withhold automatically. Others may withhold only if you submit an election. Investment income may have no withholding at all.

The result is that a retiree can receive the expected amount of income during the year and still face an unexpected tax bill.

Good retirement tax planning should answer two questions:

  1. How much tax are you likely to owe?
  2. Which income sources should be used to pay it throughout the year?

Why withholding becomes more complicated after retirement

Your employer’s payroll system considers your salary and the information provided on Form W-4. It does not necessarily account for every other source of household income, but it provides a consistent starting point.

After retirement, there may be no single payer looking at the complete picture.

Your pension administrator does not know how much you are withdrawing from an IRA. Your IRA custodian does not know about your spouse’s salary. The Social Security Administration does not know whether you realized capital gains or completed a Roth conversion.

Each institution sees only the payment it is making.

That means the responsibility for coordinating withholding shifts to you.

This is particularly important for pharmaceutical executives whose first retirement years may include a combination of:

  • Final salary
  • Annual bonuses
  • RSU vesting
  • Stock-option exercises
  • Severance
  • Deferred-compensation payments
  • Pension income
  • Portfolio withdrawals
  • Employer-stock sales

A default withholding election on one payment is unlikely to reflect the tax liability created by the entire household.

Start with a household income projection

Before changing any withholding election, estimate the income that will appear on the household’s tax return.

Include:

  • Salary and bonuses
  • Pension and annuity income
  • Traditional IRA withdrawals
  • Required minimum distributions
  • Social Security benefits
  • Deferred compensation
  • Interest and dividends
  • Capital gains and losses
  • Rental or business income
  • Consulting income
  • Roth conversions
  • Income earned by a spouse

Also estimate deductions, credits and prior tax payments.

The objective is not to predict the tax return to the exact dollar. It is to create a reasonable projection that can guide withholding and estimated-tax decisions.

This projection should be updated when circumstances change. A large capital gain, additional Roth conversion, unexpected bonus or change in retirement date can materially affect the result.

Review withholding from your final employment income

The year you retire may be one of the most complicated tax years.

Your income could include:

  • A partial year of salary
  • A final annual bonus
  • Unused paid time off
  • Severance
  • RSU income
  • Stock-option income
  • Deferred compensation
  • Pension or IRA distributions

Do not assume the amounts withheld by your former employer will cover the household’s complete liability.

Bonuses and other supplemental wages may be subject to a flat federal withholding rate that is lower than your marginal tax rate. RSU withholding can create the same problem.

Before your final paycheck, compare total projected withholding with the projected tax liability. If there is a shortfall, you may be able to request additional withholding while you are still on payroll.

This may be easier than trying to correct the entire shortfall after employment ends.

For additional year-end considerations, see A Year-End Tax Planning Checklist for Executives Nearing Retirement.

Pension and annuity withholding

Periodic pension and annuity payments generally use Form W-4P.

Periodic payments are payments made at regular intervals, such as monthly, quarterly or annually, for a period of more than one year.

Form W-4P allows you to provide information about:

  • Filing status
  • Other income
  • Multiple pensions or jobs
  • Deductions
  • Tax credits
  • Additional withholding

You generally submit a separate Form W-4P for each pension or periodic annuity payment.

That last point is important. If you and your spouse receive several pensions, each payer may calculate withholding as though its payment is the household’s only income.

The combined result may be too little withholding.

You do not necessarily need to withhold proportionally from every pension. You may choose to concentrate the required withholding in one reliable income source if that is administratively easier.

The goal is the correct household total.

IRA withdrawals and Form W-4R

Nonperiodic retirement distributions generally use Form W-4R.

For a nonperiodic payment that is not an eligible rollover distribution, the default federal withholding rate is generally 10 percent. You may usually elect a rate between zero and 100 percent.

The 10 percent default should not be confused with your actual tax rate.

If an IRA withdrawal falls within a 22, 24 or higher marginal bracket, 10 percent withholding may be insufficient.

Eligible rollover distributions follow different rules. A taxable eligible rollover distribution paid to you instead of being sent directly to another eligible retirement account is generally subject to 20 percent federal withholding.

A direct rollover generally avoids this mandatory withholding because the money moves directly between retirement accounts.

Required minimum distributions are not eligible rollover distributions. You may generally choose the withholding rate applied to an RMD.

This creates an important planning opportunity. Some retirees use withholding from an RMD or another IRA distribution to cover taxes associated with several income sources.

Withholding is taken from a distribution, and the distribution itself is taxable. If you are under age 59½, an additional tax may apply unless an exception is available.

Before choosing a withholding percentage, consider:

  • The taxable amount of the distribution
  • Other retirement income
  • Investment gains
  • Roth conversions
  • Social Security taxation
  • State income taxes
  • Whether you are already making estimated payments

Social Security withholding

Federal income tax is not automatically withheld from Social Security benefits.

You can request voluntary withholding by submitting Form W-4V or using a process provided by the Social Security Administration.

The available federal withholding percentages are:

  • 7 percent
  • 10 percent
  • 12 percent
  • 22 percent

These limited choices may not produce the exact amount your plan requires.

You may decide to withhold from Social Security, but you are not required to use Social Security as the primary source of tax payments. You could instead increase withholding from a pension or IRA distribution.

The correct choice depends on the household’s complete income picture.

Social Security withholding should also be reconsidered when:

  • A spouse claims benefits
  • Employment income ends
  • Pension income begins
  • Required distributions begin
  • A large Roth conversion is planned
  • Investment income changes

Deferred compensation may use different rules

Nonqualified deferred-compensation plans do not necessarily follow the pension and IRA withholding procedures.

Payments may be treated as wages and reported on Form W-2. The plan may continue using payroll withholding rules even though you are no longer actively employed.

Review:

  • The payment schedule
  • Whether payments will be reported on Form W-2
  • Federal withholding elections
  • State withholding
  • Social Security and Medicare tax treatment
  • The effect of other household income
  • Whether the payment will overlap with a bonus, pension or IRA withdrawal

A large deferred-compensation payment may be withheld at a rate that does not match the household’s actual marginal rate.

Request a distribution and withholding estimate from the plan administrator before the payment year begins.

Investment income may have no withholding

Interest, dividends and capital gains generally do not arrive with federal income tax already withheld.

This can create a growing shortfall during retirement.

For example, you may receive:

  • Bank interest
  • Bond interest
  • Taxable mutual-fund distributions
  • Qualified and nonqualified dividends
  • Capital-gain distributions
  • Gains from selling investments
  • Gains from selling employer stock

Your brokerage statement may show substantial taxable income without any corresponding tax payment.

You can cover the liability by:

  • Increasing withholding from a pension
  • Increasing withholding from an IRA distribution
  • Requesting withholding from another eligible payment
  • Making quarterly estimated-tax payments
  • Using a combination of withholding and estimated payments

Selling investments solely to pay an unexpected tax bill can add further taxable gains, so it helps to plan for the payment in advance.

Roth conversions require their own withholding decision

A Roth conversion generally creates taxable income in the year of conversion.

You may have the option to withhold tax directly from the converted amount. However, withholding reduces the amount that reaches the Roth account.

For example, if you convert $100,000 and withhold $25,000, only $75,000 reaches the Roth IRA.

The withheld amount may also be treated as a distribution. If you are under age 59½, that distribution could create additional tax consequences unless an exception applies.

When possible, paying the conversion tax from funds outside the retirement account may allow the full conversion amount to remain invested in the Roth IRA. Investing involves risk, and growth is not guaranteed.

The withholding decision should consider:

  • Your age
  • Available cash
  • The size of the conversion
  • Your marginal tax rate
  • Other income
  • Estimated-tax payments
  • The source of the tax payment
  • The effect on portfolio liquidity

A Roth conversion should be evaluated within a multi-year Roth Conversion Strategy, not as an isolated year-end transaction.

Withholding and estimated payments are not the same

Federal taxes can generally be paid through:

  • Withholding
  • Quarterly estimated-tax payments
  • A combination of both

Estimated payments are associated with specific payment periods. Paying a large amount late in the year may not fully correct missed payments from earlier periods.

Federal withholding generally receives more flexible treatment when calculating an underpayment penalty. Unless you elect to use the actual withholding dates, withholding is generally treated as though it was paid throughout the year.

This can make additional withholding from a late-year IRA distribution a consideration when a projected shortfall is discovered, subject to the distribution and additional-tax points described above.

However, the strategy should be reviewed carefully. The availability and treatment of withholding depend on the type of payment and the applicable tax rules.

Understand the estimated-tax safe harbor

A safe harbor can help you avoid an underpayment penalty. It does not necessarily mean your full tax liability has been paid.

In general, taxpayers may avoid an underpayment penalty when their withholding and timely estimated payments equal at least the smaller of:

  • 90 percent of the current year’s tax, or
  • 100 percent of the prior year’s tax

If the prior year’s adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the prior-year threshold generally increases from 100 percent to 110 percent.

A taxpayer can satisfy the safe harbor and still owe a substantial balance when filing the return.

Consider an executive who retires after a high-income year. If the 110 percent prior-year threshold applies, it may require larger payments than the 90 percent current-year test, because retirement income can be lower than the prior year’s earnings.

Alternatively, the current year could include a large Roth conversion or capital gain that makes the prior-year safe harbor attractive despite the remaining balance due.

The safe harbor is a penalty-management tool. It is not a substitute for projecting the actual tax liability.

Do not overlook state income taxes

Federal withholding is only part of the analysis.

State rules vary based on:

  • State of residence
  • Source of the income
  • Type of retirement distribution
  • Pension exclusions
  • Social Security taxation
  • Deferred-compensation sourcing
  • Residency changes
  • Whether the payer offers state withholding

This becomes especially important if you retire and move to another state.

A former employer may continue reporting deferred compensation to the state where you worked. A pension may be treated differently. Employer-stock sales can create additional sourcing questions.

Review both federal and state withholding before changing residency or beginning a large distribution.

A pharmaceutical executive example

The following hypothetical example is for illustration only. It does not describe an actual client or result.

Consider a pharmaceutical executive retiring in June.

During the year, she expects:

  • Six months of salary
  • A prior-year bonus paid in March
  • RSUs vesting in February and May
  • Monthly pension payments beginning in July
  • A deferred-compensation distribution in September
  • Dividends and capital gains
  • A partial Roth conversion in November

Her salary, bonus and RSUs have withholding, but the withholding rate may not match her actual marginal rate.

The pension begins with its own withholding election. The deferred-compensation plan uses a separate payroll process. Investment income has no withholding. The Roth conversion creates additional taxable income.

Looking at each payment independently could produce five apparently reasonable withholding decisions and one large household shortfall.

A coordinated approach would:

  1. Project total household income.
  2. Estimate the federal and state liability.
  3. Subtract withholding already completed.
  4. Review the remaining payment schedule.
  5. Choose the most convenient sources for additional withholding.
  6. Determine whether estimated payments are also necessary.
  7. Update the projection after the final bonus and RSU amounts are known.

The objective is not perfect precision. It is a deliberate payment plan.

A retirement withholding checklist

Before the year begins, identify:

  • Every expected source of income
  • Which payments will have withholding
  • The current withholding election for each source
  • Income that will not have withholding
  • Prior-year tax
  • Projected current-year tax
  • Applicable safe-harbor amount
  • Federal estimated payments
  • State estimated payments

During the year, review the projection after:

  • Retirement
  • A bonus payment
  • RSU vesting
  • A stock-option exercise
  • A large investment sale
  • A Roth conversion
  • A deferred-compensation payment
  • Social Security starting
  • A required distribution
  • A change in marital status
  • A move to another state

Before year-end, compare:

  • Total projected tax
  • Total withholding
  • Estimated payments
  • Remaining distributions
  • Expected balance due or refund
  • Potential underpayment exposure

Frequently Asked Questions

Is 10 percent withholding from an IRA distribution enough?

Not necessarily. Ten percent is generally the default for certain nonperiodic distributions. Your actual tax rate depends on total household income, deductions, credits and other tax items.

Can I have taxes withheld from Social Security?

Yes. You can request voluntary federal withholding of 7, 10, 12 or 22 percent using Form W-4V or the process provided by the Social Security Administration.

Do I need a separate Form W-4P for each pension?

Generally, yes. A separate Form W-4P is typically submitted to each payer of periodic pension or annuity income.

Is 20 percent withholding required on every retirement distribution?

No. The 20 percent rule generally applies to an eligible rollover distribution paid to you rather than transferred through a direct rollover. Other distributions may follow different rules.

Can I use an RMD to pay taxes on other income?

You may be able to request additional withholding from the RMD and use that withholding toward the household’s total federal tax liability. The appropriate amount depends on the complete tax projection.

Should I withhold taxes from a Roth conversion?

That depends on your age, available cash and the amount being converted. Withholding from the conversion reduces the amount deposited into the Roth IRA and may create additional consequences.

Is avoiding an underpayment penalty the same as paying the correct tax?

No. A safe harbor may prevent a penalty while still leaving a balance due with the tax return.

How often should I review retirement withholding?

At least annually and whenever there is a material change in income, tax law, distributions, investments or family circumstances.

Retirement withholding should be coordinated

Retirement does not eliminate the pay-as-you-go tax system.

It replaces one payroll department with several income sources, each operating under different rules.

A more effective approach is generally not to apply a default percentage to every payment. It is to estimate the household’s total liability and then coordinate withholding across the most practical income sources.

That may reduce surprises, support cash-flow planning and help align tax payments with the broader retirement strategy.

Take the Next Step

If you are transitioning from executive compensation to pensions, IRA withdrawals, Social Security, deferred compensation and investment income, an Integrated Retirement Review can help you evaluate your income, withholding and tax strategy before retirement begins.

Federal tax rules, forms and withholding rates described in this article reflect IRS guidance as of November 11, 2026, for tax year 2026 and are subject to change. State rules vary. The pharmaceutical executive example is hypothetical, is for illustration only, and does not describe an actual client or result. This article is educational, is not individualized tax, legal or investment advice, and does not account for your personal circumstances.

Investing involves risk, including the possible loss of principal. Growth is not guaranteed.