Employers spend an entire career calibrating federal withholding to match each paycheck’s tax bracket, and most workers never think about the process.
That calibration disappears the day a retiree starts drawing from a traditional individual retirement account (IRA) at Charles Schwab, because the custodian’s default withholding drops to 10% of every distribution regardless of the account holder’s actual bracket.
For a retiree already in the 24% federal bracket, a $50,000 withdrawal sends only $5,000 to the IRS when the actual liability on that distribution is $12,000. The $7,000 difference, plus any underpayment penalty, arrives as a single bill at filing.
The shortfall comes down to a single line on IRS Form W-4R that most account holders never adjust before requesting an IRA distribution.
The form ships with a flat 10% election, and that rate stays locked in for every future withdrawal until the account holder files a replacement.
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Schwab applies the IRS default, and the default favors the lowest bracket
Nonperiodic distributions include all payments other than periodic payments, such as lump-sum withdrawals and cash distributions taken outside a regular annuity stream, IRS Publication 575 explained.
Each income source in retirement follows a different default withholding rate, and the IRA’s 10% sits at the lowest end of qualified plan defaults.
Hayden Adams, Director of Tax Planning and Wealth Management Research at Charles Schwab, warned that the default withholding on each retirement income source does not guarantee full coverage of the tax bill.
<strong>Taxes are automatically withheld from some income sources but not from others, and the amounts withheld may not satisfy your actual tax liability,</strong>
The gap hits hardest when pension, Social Security, and investment income place the retiree above the 10% bracket before any IRA withdrawal.
The 24% bracket turns a $50,000 IRA distribution into a $7,000 shortfall
Under the 2026 brackets from IRS Revenue Procedure 2025-32, single filers pay 24% on taxable income between $105,700 and $201,775. A retiree whose combined income from other sources already totals $110,000 starts the IRA withdrawal inside that 24% band.
Adding a $50,000 distribution pushes total taxable income to $160,000, and every dollar of the withdrawal falls within the 24% range.
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A retiree carrying that $7,000 gap into filing season with no estimated payments on record crosses the safe harbor threshold by a wide margin, triggering underpayment interest from the first missed quarterly deadline.
Married couples filing jointly face the same gap at a higher threshold, with the 24% bracket starting at $211,400 under the same revenue procedure.
By contrast, eligible rollover distributions from a 401(k) are subject to a 20% default withholding rate, double the IRA default, under Internal Revenue Code Section 3405(c).
Underpayment penalties can compound the April balance
A $7,000 shortfall has consequences beyond the tax bill because the IRS requires prepayment through withholding or estimated payments each year.
The safe harbor threshold equals the lesser of 90% of current-year tax or 100% of prior-year liability. Taxpayers whose prior-year adjusted gross income exceeded $150,000 must cover 110% of that year’s liability instead, the IRS noted in Publication 505.
No penalty applies when the balance due after withholding and credits stays below $1,000, the IRS confirmed in Tax Topic 306.
That shortfall exceeds the threshold by a wide margin, so the underpayment penalty interest begins accruing on the full amount.
The underpayment interest rate resets each quarter at the federal short-term rate plus three percentage points, the IRS explained on its rate page.
For retirees carrying that shortfall with no estimated payments on file, the accumulated penalty can add hundreds of dollars by the filing deadline.
3 IRS-sanctioned options exist for closing the withholding gap before year-end
The first option is to match the withholding rate to the actual bracket before the next withdrawal.
The 2026 Form W-4R lists a marginal rate table that account holders can reference before submitting a distribution request, and the form accepts any whole-number rate from 0% to 100%, so a retiree in the 24% bracket can elect a matching rate and eliminate the gap on every future distribution.
The second option is to send an estimated payment to cover the shortfall on distributions already taken at the default rate. The IRS Form 1040-ES instructions allow retirees to submit a payment before January 15, 2027 that can satisfy the safe harbor requirement and reduce exposure to underpayment penalties, Publication 505 confirmed.
The third option applies to retirees who have not yet taken a 2026 required minimum distribution. Waiting until December 2026 and requesting a higher withholding rate on that single transaction lets the custodian route enough to the IRS in one withdrawal, Kiplinger noted.
The IRS treats withholding from any distribution as paid across all four quarters regardless of when the withdrawal occurs, so a December distribution with elevated withholding can cover the entire year’s liability, Publication 505 confirmed.
Catherine Valega, a Certified Financial Planner and Founder of Green Bee Advisory, told Yahoo Finance that retirees should track their tax bracket throughout the year rather than discovering the gap at filing.
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