Thoughts on Retirement Income Tax Withholding

By Alan Silverstein, Fort Collins, Colorado. Email me at ajs@frii.com.
Last update: May 7, 2017

Here are some thoughts about managing income tax withholding for retired people, at least in the US.

As best I can tell, few retired people must make quarterly estimated income tax payments (QEP, Form 1040-ES). There are other widely-available options to avoid interest and penalties without doing QEP.

I read on the web the surprising (to me) statement that any W2 or 1099 withholding done at any time throughout the year is applicable to the entire year -- which can obviate the need for QEP. I checked this out for myself by analyzing the TY2014 Form 1040 and its instructions, and it appears to be true. See line 79 (estimated tax penalty) regarding lines 64 and 65 (various types of withholding) and/or my summary later in this webpage.

This section includes most but not all of the details underlying the three "safe harbor" rules, which I summarize imprecisely as:

Even if you have no W2s, most sources of 1099 income seem to provide a way to do optional withholding (at least for federal taxes). For example you can tell Social Security to do it, and it shows up on your SS-1099 form, although of course in this case the withholdings are monthly.

Another example: If you distribute from your traditional IRA at Vanguard, you can tell them to withhold up to 100% (but curiously, not less than 10%) of the withdrawal for federal taxes (but not state taxes, beware). Meaning if necessary you could hypothetically do a pure-withholding withdrawal on December 31 of any tax year to get into your (best-estimated) safe harbor for the year.

Remember to consider state income tax withholding too, in states where it matters. It's easy to overlook this. For example, Colorado's safe harbors are the same as the federal ones, except the last one is 70% not 90%. (But due to the state's lower tax rate, and generous exemption of $20K/person for taxable retirement income ($24K for age 65+), you're unlikely to owe more than $1K anyway.)


Summary of alternatives for handling tax withholding in retirement:

Note: There's no single best answer, it depends on your personal circumstances and preferences. What's important is being aware of and knowing the rules, and choosing a method that works for you. I've heard examples of people using every one of the methods below.


Some particular concerns:


Analysis of 2014 Form 1040: