After you retire, you may still have to pay income taxes – even if you don’t have a job. When you were employed, your income was considered “earned” income. But in retirement, you may have “unearned” income, which is what you receive from your pension or an Individual Retirement Arrangement (IRA). And you’ll typically have to pay income taxes on these income sources.
But instead of dreading a big tax bill at the end of the year, the IRS allows you to make incremental tax payments as you receive your retirement income or other types of deferred-compensation pay. Your first step toward setting up these payments starts with IRS Form W-4P (Withholding Certificate for Pension or Annuity Payments).
What Is a W-4P Form?
A comparative way of looking at the W-4P form is that it is the unearned income counterpart of the earned income Form W-4 (Employee’s Withholding Certificate). When you work as an employee, the W-4 form is what you submit to your employer to set the tax-withholding ball in motion. Based on the tax information submitted on the W-4, your employer withholds income tax from each of your paychecks. Similarly, based on the tax information you provide on your W-4P, the payer of your IRA or other deferred compensation plan withholds income tax from each payment you receive under the plan.
Form W-4P is for the use of U.S. citizens, resident aliens or the estates of U.S. citizens and resident aliens. Form users must be recipients of pensions, annuities and/or certain deferred compensation plans.
W-4P Data Fields
The W-4P form may be one of the shortest tax forms you’ll ever complete. It contains only three data fields for you to fill out – plus a space for your name, address and Social Security number. But its brevity is no indicator of this form’s importance.
Line 2 is the meat of the form, because this is where you’ll note the number of allowances you’re claiming along with your marital status. Your plan administrator uses this data to calculate the amount of tax that’s withheld from each of the payments you receive.
But you can also elect not to have federal tax withheld from your payments by checking the box on Line 1. And if you want more tax withheld from each payment you receive than your claimed allowances dictate, you can designate a dollar amount for that on Line 3.
Use of W-4P Allowances
Investopedia states that “withholding allowance” is the term that describes a type of exemption that lessens the amount of tax withheld from each paycheck (or distribution from a retirement plan, for example). The math behind this calculation is inversely proportional, which means that a payer withholds less money from your periodic payments for each allowance you claim. And less money withheld means more money you actually receive.
If you want to align your total annual tax liability as closely as possible with the amount of total tax that’s withheld from your distributions during the tax year, the IRS provides three worksheets with the W-4P form for your calculations. To access these worksheets, visit IRS.gov and click the “Forms & Instructions” tab. When the page loads, enter “Form W-4P” in the “Forms, Instructions and Publications Search” box. This will take you to a clickable link where you can view, download and print the W-4P, the form’s instructions and its worksheets.
It’s important to note that this withholding allowance exemption is not the same as a personal or dependent exemption. H&R Block states that the 2017 Tax Cuts and Jobs Act (TCJA) suspended personal and dependent exemptions for the tax years 2018 to 2025.
W-4P's Three Worksheets
The worksheets walk you through a step-by-step process of figuring your allowances. You’ll probably not need to fill out all three worksheets; only the one (or ones) that applies to your particular financial situation.
- Personal Allowances Worksheet – Begin with this worksheet to compute how many withholding allowances you'll claim. Start by claiming “2” for yourself on Line A, and add more allowances as you work through Lines B and C, depending on your filing status. If you’re eligible to claim the Child Tax Credit (CTC) for any qualifying children, follow the instructions on Line D to reduce your tax liability. Refer to IRS Publication 972 (Child Tax Credit) if you’re unsure whether you qualify for this credit or not. You may also be able to claim a tax credit for other qualifying dependents, as outlined in IRS Publication 505 (Tax Withholding and Estimated Tax). If so, follow the instructions on Line E to figure your total income. And if you’re eligible for other tax credits, such as the Earned Income Tax Credit (EITC), Line F’s instructions allow for this. Publication 505 has worksheets that help you account for these additional credits.
- Deductions, Adjustments and Additional Income Worksheet – This is the worksheet you’ll use if you want to have less tax withheld from your pension or annuity payments because of itemized deductions you’re allowed to claim. It’s an optional worksheet – you do not have to use it, and you do not have to opt for a lower withholding amount. But if you choose this option, you’ll receive higher payments throughout the year (but a lower refund). This worksheet is also what you'll use to compute the amount of withheld tax from other sources of unearned income, including dividends, interest payments and capital gains.
- Multiple Pensions/More-Than-One-Income Worksheet – You’ll use this worksheet if you receive income from more than one pension or if you have income from a job as well as a pension. Another reason you’ll use this worksheet is if you file a joint tax return with a spouse who receives income from a job or a pension. Additional sources of income may mean you won’t have enough tax withheld throughout the year, which means you may owe more tax at the end of the year and possibly receive a penalty.
W-4P Worksheet Option
If you prefer not to print the W-4P worksheets, take pencil in hand and manually do the calculations that determine your number of allowances, you have another option. The IRS has an online calculator tool that does all the math for you. In fact, the IRS recommends using this calculator as a “paycheck checkup” to ensure that your current withholding allowances are the most accurate reflection of any new tax legislation. You can find the IRS Withholding Calculator here.
W-4P No-Withholding Option
Although Form W-4P is primarily used to notify the payer of your distribution plan the number of withholding allowances you’re claiming, you can also use this form for other reasons. If you decide that you do not want any federal income tax withheld from your payments (two exceptions include payments that are delivered to
You’ll also use the W-4P form to designate an optional, additional amount of income tax that you want withheld. These choices depend on whether your payments are periodic or nonperiodic and whether they meet eligibility requirements on pages 2 and 3 of the Form W-4P instructions.
Eligible rollover distributions, which include 401(k) and Section 457(b) plans that are maintained by a governmental employer as well as tax-sheltered annuities that are eligible to be rolled over to an IRA or other qualified plan, must carry a 20 percent tax-withholding rate. For these types of plans, you do not have the option of choosing to have no federal income tax withheld. You don't even have to submit Form W-4P to your plan payer unless you want an amount more than the 20 percent rate withheld from your payments. If this is the case, submit a W-4P to your payer, and enter this additional amount on Line 3.
Income Excluded From Form W-4P
Per IRS guidelines, you cannot use Form W-4P to choose no withholding for all types of retirement income. The IRS classifies some types of periodic retirement payments as wages that are subject to federal withholding tax. Examples include some U.S. Armed Forces retirement pay, some deferred compensation payments that are under nonqualified plans, such as 457(b) plans, and deferred compensation plans from some tax-exempt organizations.
When to Adjust Your W-4P
Financial situations can sometimes change on a dime. If this happens to you, and you find that too much or too little federal income tax is withheld from your retirement income or other distribution plan, adjust your Form W-4P to reflect your new circumstances that likely will affect your tax liability. For example, your marital status may change or you may start a new job (or lose a job).
And because your tax liability is also dependent on new tax legislation, you may want to use the IRS online withholding calculator each year as a heads-up notice that it's time to tweak your allowances.
How to Adjust Your W-4P
It’s a simple process to adjust your previously submitted information on Form W-4P. After manually re-figuring your new number of allowances on the W-4P worksheet or electronically calculating them through the IRS online withholding calculator tool, complete a new W-4P and furnish it to your pension plan administrator or another deferred compensation payer. You don’t have to turn in your worksheet; only the W-4P form itself.
Enter the new number of allowances on Line 2, and designate any additional amount you want withheld on Line 3. If you’ve previously checked the box on Line 1 to request that no taxes be withheld from your payments and now you want to change that designation to having taxes withheld, you will not check the box on Line 1 of your revised W-4P.
In the event of your death, the beneficiary or administrator of your will can also make the decision not to have taxes withheld from your payments by following the same steps as you would to submit a W-4P. But your beneficiary or administrator must also include your estate's employer identification number (EIN), which will take the place of your Social Security number in the corresponding data field on the W-4P. An exception is an eligible rollover distribution, as described in the W-4P instructions.
W-4P Errors and Omissions
Your Social Security number is an all-important piece to the W-4P form. If you incorrectly submit the wrong number, it will not match the number on your retirement plan or deferred compensation paperwork. If this happens, the payer of your funds is required to withhold tax at the rate that corresponds to a single taxpayer who claims no allowances. This will happen even if you have checked the Line 1 box that exempts you from federal withholding tax.
If you receive nonperiodic payments – for example, on-demand IRA distributions – the plan payer is required to withhold at the flat rate of 10 percent of the taxable payments unless you check the Line 1 box for exemption from federal withholding tax.
- IRS: Form W-4P
- Investopedia: Withholding Allowance
- H&R Block: The New Standard Deduction and Removal of Exemptions - What Does it Mean to You?
- IRS: About Publication 972 - Child Tax Credit
- IRS: About Publication 505 - Tax Withholding and Estimated Tax
- IRS: IRS Withholding Calculator
- IRS: IRC 457(b) Deferred Compensation Plans
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.