Retirement and Taxes: What Preparers Should Tell Clients About Retirement Income
The IRS explains how pensions, Social Security, and retirement account withdrawals are taxed, plus withholding, estimated payments, and required minimum distributions.
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- IRS source: Preparing for retirement? Know how it can affect taxes
Retirement is a big change, and it can change a client's tax picture too. Many clients who have worked for decades have never had to think about how their pension, Social Security, or IRA withdrawals are taxed. The IRS Tax Tip 2026-77 gives preparers a clear list of points to cover before a client stops working. Here is what it says and how you might use it in client meetings.
Retirement income is not always taxed the same way
The IRS notes that each source of retirement income may be taxed differently:
- Pensions and annuities: Payments may be fully or partially taxable, depending on how the retirement plan was funded.
- Social Security benefits: Depending on the client's filing status and other income, a portion of the benefits may be taxable.
- Retirement account withdrawals: Distributions from traditional IRAs and other retirement plans are generally taxable. However, qualified Roth distributions are tax-free.
Ask clients which of these income sources they will have in retirement. A client with a traditional IRA and a Roth IRA will not necessarily owe the same tax on each withdrawal.
Check withholding before the first payment
Newly retired clients, or those about to retire, may need to adjust their withholding. The IRS says they can generally ask for federal income tax to be withheld from pensions, annuities, and Social Security payments. The tip also warns that this may not be enough.
The IRS Tax Withholding Estimator is a free tool that helps workers and retirees estimate how much federal income tax to withhold for the taxes they will owe next year. The IRS says the estimator reflects the changes to credits and deductions under the Working Family Tax Cuts, including the enhanced deduction for seniors.
If withholding does not cover the client's tax obligations, the client may need to make estimated tax payments during the year. Running the estimator with a client before retirement starts can help avoid a surprise at filing time.
Know when required withdrawals begin
The IRS says that taxpayers generally must begin taking required minimum distributions from traditional IRAs and certain retirement plans when they reach age 73. Different rules may apply depending on the type of retirement account and when the taxpayer retires. Check each client's accounts one by one rather than applying a single rule to everyone.
What to tell your clients
- Retirement income can come from several sources, and each may be taxed differently.
- Social Security benefits may be partly taxable depending on filing status and other income. The IRS Interactive Tax Assistant can help check this.
- Withholding from pensions, annuities, and Social Security may not be enough. Use the IRS Tax Withholding Estimator to compare.
- Estimated tax payments may be needed during the year if withholding falls short.
- Required minimum distributions from traditional IRAs and certain plans generally start at age 73, and the rules depend on the account type and retirement date.
This article summarizes IRS Tax Tip 2026-77, published October 27, 2026. For details on any specific client situation, check the IRS resources for seniors and retirees, including the publications and tools linked from the IRS tip.
Informational only, based on the IRS source linked above; not tax or legal advice for a specific situation.