Schwab Withholds 10% From an IRA Withdrawal Unless You Change One Line on the Form. For a Retiree in the 24% Bracket That’s a $7,000 Surprise in April on a $50,000 Distribution
Most retirees assume their IRA custodian withholds enough to cover their tax bill, and that assumption costs them thousands every April. The reason traces back to a single line on a form that almost nobody changes.
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Every April, the same scene plays out at kitchen tables across the country. A retiree who took a big IRA withdrawal the year before opens the tax software expecting a small bill and finds a balance due in the thousands. Nobody made a mistake. The custodian withheld exactly what federal law told it to, and that amount was never built to match what the retiree actually owed.
At Charles Schwab (NYSE:SCHW | SCHW Price Prediction), as at every IRA custodian, the default federal withholding on a one-time IRA withdrawal is 10%. If your income already sits in the 24% bracket, a $50,000 distribution leaves a $7,000 gap. Here’s where that number comes from, plus the one line on the form that closes it.
Where the 10% IRA Withholding Default Comes From
The rule lives under section §3405(b)(1), which tells the payer of any nonperiodic distribution to withhold 10% of it. A nonperiodic distribution is any withdrawal that isn’t part of a regular installment stream. That covers most of the lump sums retirees take out for a car, a roof or a wedding.
IRS Publication 505 for 2026 spells out the fix. You use Form W-4R, line 2, to pick a rate other than the default, and you can choose anywhere from 0% to 100%. Schwab’s IRA Distribution Form has the same election in its tax withholding section, which shows the 10% federal default. Schwab’s form also says your election “will remain in effect on all distributions from this IRA until you change or revoke it.”
That 10% lines up with the lowest federal bracket. If your income sits in any higher bracket, the default will come up short.
How a $50,000 IRA Withdrawal Becomes a $7,000 April Bill
Take a sample single filer in tax year 2026. Her pension, the taxable part of her Social Security and her investment income already add up to $110,000 of taxable income before she touches the IRA. Single taxpayers in 2026 pay 24% on income over $105,700, and the 32% rate starts in above $201,775.
| Line | Amount |
|---|---|
| Taxable income before withdrawal | $110,000 |
| IRA distribution | $50,000 |
| Taxable income after withdrawal | $160,000 |
| The $50,000, all taxed at 24% (federal) | $12,000 |
| Withheld at the 10% default | $5,000 |
| Still owed at filing | $7,000 |
Every dollar of the withdrawal lands in the 24% band, so it adds $12,000 of federal tax. Schwab sends $5,000 to the IRS, and the other $7,000 comes due in April. Brackets work like fill lines: only income above $105,700 gets taxed at 24%, and in this example the whole distribution sits above that line.
Married couples run into the same gap at higher incomes. The 24% bracket for joint filers begins at $211,400 of taxable income in 2026. In most states, state income tax adds to the bill, and state withholding rules differ by state.
Underpayment Penalties Can Stack on Top of the Balance Due
A big bill in April can also bring a penalty. Under IRS Publication 575, you generally need to make estimated payments for 2026 if you expect to owe at least $1,000 after withholding and credits. That applies when your withholding covers less than the smaller of 90% of your 2026 tax or 100% of your 2025 tax. If your 2025 adjusted gross income exceeded $150,000, the second test rises to 110%. A $7,000 shortfall clears the $1,000 threshold easily.
The 401(k) rules make a useful contrast. Distributions from a 401(k) that are eligible for rollover face a 20% default, and the IRS itself warns that this default “may be too low for your tax situation.” IRA withdrawals start at half that rate.
Three Ways to Close the Gap Before Year-End
- Write your bracket on line 2. In the example, choosing 24% sends the full $12,000 to the IRS. If your state taxes IRA income, add a few points to cover it.
- Enter “-0-” and pay estimates. The IRS allows a zero election on line 2. This fits retirees who want the full $50,000 now and plan to cover the tax with quarterly Form 1040-ES payments from a taxable account. Because Schwab’s election carries forward, reset it on the next request if you want withholding again.
- Use a late-year withdrawal as a catch-up. The IRS generally handles withholding as paid evenly over the year, no matter when it actually happened. Heavy withholding on a December distribution or required minimum distribution can cover a shortfall from a withdrawal taken in spring.
It’s mid-October, so 2026 withholding can still be fixed. The most common mistake is reading the 10% on the confirmation screen as the tax itself. It’s a deposit toward your bill. Your bracket sets what you actually owe, and a CPA can run the bracket and safe-harbor math against your full-year income before the December request goes in. The default withholding rate is one of several IRS quirks that quietly drain retirement accounts, and our free guide covers the rest: The Retiree’s Tax Trap Map.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
