Retirees Who No Longer Get a Paycheck Often Forget This Tax Bill Until It’s Too Late
Most new retirees assume skipping quarterly payments just delays the bill until April, but the IRS treats that delay as a debt with interest attached, and a single overlooked form before year-end can still undo the damage.
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For decades, an employer covered the hardest part of your tax bill: paying it. Every paycheck sent a portion to the IRS. Then the paychecks stop, IRA withdrawals and Social Security deposits take over, and in many households nobody sends the IRS anything until April.
That gap costs money. Federal law requires you to pay tax as the income comes in. Retirees who wait until filing season can owe the full bill plus an underpayment penalty under Section 6654 of the Internal Revenue Code. Here’s how the trap forms, and the year-end fix that can still rescue 2026.
How a Quiet First Year of Retirement Turns Into a $4,900 April Bill
Consider a sample couple, age 67, in their first full year without wages in 2026. They collect the average Social Security benefit for an aged couple, $3,208 a month, and pull $60,000 from a traditional IRA. To keep every dollar, they told the custodian to withhold nothing.
Here’s their 2026 federal math on a joint return:
| Line | Amount |
|---|---|
| Social Security received | $38,496 |
| IRA withdrawals | $60,000 |
| Taxable Social Security (85%) | $32,721.60 |
| Adjusted gross income | $92,721.60 |
| Standard deduction | $32,200 |
| Additional standard deduction, two filers 65+ | $3,300 |
| Enhance senior deduction, two filers | $12,000 |
| Taxable income | $45,221.60 |
| Federal income tax | $4,930.59 |
| Tax paid during the year | $0 |
Their taxable income fits the 10% bracket, which runs to $24,800 on a joint return in 2026. Only the dollars above that line are taxed at 12%.
Section 6654 Wants Your Tax in Four Installments
Section 6654 splits each year’s tax into 4 required installments, due April 15, June 15, September 15 and January 15 of the following year. Miss them and the IRS charges a penalty that works like interest, figured separately for each late quarter.
There are two escape exits. You owe no penalty if the tax due after withholding comes to less than $1,000. You’re also safe if you paid the smaller of 90% of this year’s tax or 100% of last year’s. That second figure rises to 110% if last year’s adjusted gross income exceeded $150,000.
Our couple misses both. To hit the 90% line, they needed to pay about $4,438 for 2026, or roughly $1,109 per quarter. Three of those deadlines have already passed.
Social Security Taxes Supercharge the Bill
Plenty of new retirees assume Social Security is tax-free. Under Section 86, joint filers whose provisional income (other income plus half of benefits) passes $44,000 can owe tax on up to 85% of their benefits. Our couple’s provisional income reached $79,248, so the full 85% counts as taxable.
The new senior deduction softens the hit. It’s worth $6,000 per person 65 or older for tax years starting before January 1, 2029. It shrinks by 6% of modified AGI above $150,000 on a joint return. Bank interest adds to the total, too. A 12-month CD yield averaged 1.76% nationally on October 1, 2026, the highest reading in a year, and every dollar of that interest is taxable.
A December IRA Withdrawal Can Fix Missed Quarterly Payments
Under Section 6654(g)(1), tax withheld during the year counts as paid in equal parts on each due date, no matter when it actually came out of your account. Estimated payments don’t get that treatment. A check mailed in December covers the fourth quarter alone.
That means our couple can take an IRA distribution in December 2026 and have at least $4,438 withheld for federal tax. The IRS spreads that money evenly across all four quarters, which can eliminate the penalty on the three deadlines they already missed.
Two other options help from here on:
- Keep the IRA default. Custodians must withhold 10% of one-time distributions unless you opt out on Form W-4R. On their withdrawals, that comes to $6,000, more than the couple’s entire bill.
- Withhold from Social Security. File Form W-4V, or ask online, to withhold 7%, 10%, 12%, or 22% of each monthly payment.
If you’d rather pay the IRS directly, the fourth 2026 installment is due January 15, 2027.
Costliest Mistake: Choosing Zero Withholding to Keep More Cash
Opting out of the 10% default feels like keeping your money. All it really does is push the bill to April and add a penalty on top. Rerun the numbers every year, because Social Security’s 3.6% cost-of-living raise for 2027 pushes provisional income up on its own.
State income taxes vary widely, and some states exempt Social Security or pension income, so your state bill may look very different from your federal one. Setting withholding across IRA withdrawals, Social Security and any Roth conversions is math worth running with a CPA before December 31 (the underpayment penalty is just one of nine IRS rules that quietly drain retirement accounts, all charted in our free tax trap map).
Contact [email protected] for any questions or corrections.
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.
